Alternative Measurement Bases in Pension Accounting: A Simulation Analysis

Simulation analysis can be used to examine the effect of alternative discount rate assumptions on the strength of associations between an economic or generational accounting basis, an actuarial funding basis of measurement and two alternative accounting measurement bases of pension assets and liabilities; value-in-use and value-in-exchange. Accounting measures are found to be more highly correlated with economic unfunded pension liabilities when they are discounted using market instead of value in use rates. The value at use rates are also more highly sensitive to differences in funding method, real versus nominal interest rates and plan initiation dates. The findings suggest that the use of alternative measurement bases for pension reporting and funding involves a trade-off between the relevance and reliability of the resulting pension disclosures. The transparency of reported corporate pension exposure would be improved through enhancing the logical consistency between combining key discount assumptions and various measurement bases. We also develop policy implications concerning the appropriateness of alternative measurement bases in reporting by various types of reporting entity, and propose the re-classification of various liability and equity-related components of pension contracts.