This one asks if vol of assets is a problem. I think the asnwer totally misses the point. It essentially talks about the problem of inconsistency with liability values. This is not the issue (you should be using a consistent method in any case!!!). The real issue is that vol of assets is only a problem if: 1) The accounting regime you operate under passes changes in surplus through the income statement 2) If you are not matching assets and liabilities (since if you are the changes in asset value will be offset by similar movements in the liability assessment). Why on earth are we teaching this financial nonsense to future actuaries!!!
Hi Gareth There is an accounting standard called FRS 17 that applies to the accounting of defined benefit pension schemes. I've "googled" FRS 17 on the internet. And this is what I found: The main requirements of FRS 17 are: pension scheme assets are measured using market values pension scheme liabilities are measured using a projected unit method and discounted at an AA corporate bond rate the pension scheme surplus (to the extent it can be recovered) or deficit is recognised in full on the balance sheet As you can see, the method used to value the assets and the method used to value the liabilities are not consistent! And this leads to volatile surpluses on the balance sheet. I hope this helps see the Core Reading in a slightly different light.
Anna thanks for getting back to me on this. FRS 17 is effectively saying that pension liabilities are not guaranteed and the choice of AA corporate bonds as the discount rate is saying what the default probability of pension funds is. Given a company operates in the UK it could simply set up a matching asset portfolio in AA rated bonds (or use government bond + credit default swap). This will remove all surplus volatility due to volatility of assets. So I have to maintain that asset volatility is only an problem if you don't setup a matching portfolio when operating in an accounting regime that recognises changes in surplus in the income statement.
