Defined benefit (DB) pension funds promise retirement benefits dependent upon an employee’s earnings history, tenure of service and age. When a DB pension fund is underfunded (when asset values are lower than the value of their liabilities, or the promised pension benefits), conflicts of interest can arise.
This conflict can occur because a reported funding shortfall in pension fund accounting depends on the liability discount rate used to value the stream of promised benefits. The higher the discount rate, the lower the reported present value of the liabilities and the stronger the pension plan’s funding position as reported in the accounting statements.
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