Book reviews: Pension Finance: Putting the Risks and Costs of Defined Benefit Plans Back Under Your Control

(ProQuest: ... denotes non-US-ASCII text omitted.)

Pension Finance: Putting the Risks and Costs of Defined Benefit Plans Back Under Your Control . M. Barton Waring . Wiley Finance , 2011, ISBN 978-1-118-10636-5 , 298 pages.

Barton Waring's preface sets out his 'aspiration to provide a thoughtful and persuasive background for those considering how to reform pension finance and accounting'. He also hopes to provide a text to describe the true operations of defined benefit (DB) retirement schemes - predominantly in the US.

The bare bones of his proposals for reform are to require that the present value of the DB pension scheme liabilities are calculated at a risk free rate of interest; that the assets are invested largely in fixed interest assets which will minimize the risk of future investment losses; and that the current deficits should be made good in a relatively short period, 'say 10 years', by additional contributions and benefit reductions. He highlights the penultimate chapter 'Tough love' as the most important, as it considers how to persuade relevant parties to address the enormous deficits in some of these funds.

The argument of the book is helpfully set out at the start with a list of 22 propositions that are argued in more detail through the book. In summary, these are:

(1)

Accounting rules do not change the ultimate cost of benefits, but they can mislead by allocating costs to the wrong periods and by misstating the value of liabilities.

(2)

Investing the assets of pension schemes in equities is risky both in the short and long runs.

(3)

DB pensions are largely predetermined cash flows and should be valued at the risk free rate, perhaps with small adjustments for credit risk.

(4)

The present value of liabilities and the accrual of pension benefits is therefore not affected by investment policy (i.e., investing in equities cannot be said to reduce the cost of pension benefits).

(5)

The current accrued liability should be negotiated between employers and employees.

The propositions are closely argued with generalized formulae; the variables and terms used being summarized in a helpful appendix. The arguments go into some detail...