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Layman's explanation of how accounting for pensions understates liabilities owed to pensioners


patslatt

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Apr 11, 2007
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13,693
See Buttonwood: Money to burn | The Economist

This article should be of interest to people who are worried that their pension plan is underfunded. Pensioners are owed a stream of future payments and their valuation in today's money depends on the interest rate used to discount them. Take a weekly pension payment of €100 due in 5 years. The liability in the accounts for it today would be €78 at a 5% discount rate and €65 at 9% discount rate,the difference in these liabilities being 17%. The more distant the future payments,the greater this difference would be-55% at 20 years,quite a temptation for liberal accounting.
 


Joined
Aug 6, 2007
Messages
22,910
See Buttonwood: Money to burn | The Economist

This article should be of interest to people who are worried that their pension plan is underfunded. Pensioners are owed a stream of future payments and their valuation in today's money depends on the interest rate used to discount them. Take a weekly pension payment of €100 due in 5 years. The liability in the accounts for it today would be €78 at a 5% discount rate and €65 at 9% discount rate,the difference in these liabilities being 17%. The more distant the future payments,the greater this difference would be-55% at 20 years,quite a temptation for liberal accounting.
Er no as the assumption of the discount rate is that the money in the pension fund will earn a return over that period of time of that rate and the accounting standards applied are quite sever.

In addition built into that will be an assumption that of the people investing on day 1 only a certain % will actually live to draw a pension.

The example quoted is US where as in Ireland the pensions are currently paid out of taxation receipts.

UK Revenue have introduced Real Time Info in employment as part of the way of going down the route of Auto Enrollment of everybody for pensions. This is a way of minimising future pension costs which ultimately Ireland will have to grasp.
 

patslatt

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Joined
Apr 11, 2007
Messages
13,693
Er no as the assumption of the discount rate is that the money in the pension fund will earn a return over that period of time of that rate and the accounting standards applied are quite sever.

In addition built into that will be an assumption that of the people investing on day 1 only a certain % will actually live to draw a pension.

The example quoted is US where as in Ireland the pensions are currently paid out of taxation receipts.

UK Revenue have introduced Real Time Info in employment as part of the way of going down the route of Auto Enrollment of everybody for pensions. This is a way of minimising future pension costs which ultimately Ireland will have to grasp.
In a private Irish company plan,if management want a higher discount rate than is justified,what accounting/actuarial arguments would the actuaries and auditors use to lower it? Does management have much of an input if any in determining the discount rate?

In Ireland,public sector pensions are paid out of tax on a pay-as-you-go basis,with hardly any money set aside. There will be an interesting economic clash a generation hence between workers and pensioners,with only about 2 workers per pensioner. Our constitution could rescue the workers, with a referendum to slash pension entitlement to a level that does not require confiscatory taxation of the employed.
 

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