The right way for accountants, auditors and actuaries to quantify the assets and the liabilities of pension fund management systems has been a matter of great controversy for a long time. Before 1985, companies in the United States had wide latitude in recognizing expenses and setting the assumptions that should guide pension fund management systems. That latitude was somewhat constrained by Financial Accounting Standards Board or FASB when it is issued in Statement 87.
Actuaries have to set pension fund management system assumptions, simply because pension benefits are paid in the future. Some of the assumptions are demographic, so they involve the expected lifespan of a 70-year-old retiree, or the number of years that a 30-year-old employee will continue to work for his employer.
Separately, pension fund management system assumptions should be made about the rate of return. The usual approach is based on a fixed discount rate that is related to the assumed real rate of return on assets. A real estate of return is the return following an adjustment for inflation, and some rate should be assumed based on the best available view of economic reality.
One of the central principles of pension fund management systems is delayed recognition. Neither changes in the pension obligations, like those that might result from a new collective bargaining agreement, nor changes in the value of the assets the fund holds with be immediately recognized. Each is recognized systematically and gradually over subsequent periods.
Offsetting Liabilities and Assets
Another broad principle of pension fund management systems is that, where possible, the liabilities should be matched against, or shown to offset, related assets. Even when the liability has not been settled and the assets may still be largely controlled, they should be shown in the pension fund management systems as netted out to give an accurate account of the financial position.