Incorporating Uncertainty into Accounting Estimates of Pension Liabilities

Abstract

This paper develops a model for obtaining an estimate of pension shortfall at a given time point and uses this model to analyze how defined benefit pension plan accounting is affected by uncertainty about rates of return. Results show that the risks of underfunding are much higher than indicated in current financial reporting. We propose that these risks be disclosed in financial reporting so as to address the disclosure problems identified in prior research.

Keywords: Pension Accounting, Pension Fund, Pension Shortfall, Uncertainty in Rates of Return