A Looming Crisis for Pensions

The Funding of Defined Benefit Pension Plans

Kathryn Easterday, PhD, CPA, and Tim V. Eaton, PhD, CPA

Pensions are an extremely important part of the U.S. economy, and the consequences of inadequate pension funding could be devastating to the millions of workers and retirees who are counting on their pension funds to provide for them in retirement. Managing, correctly accounting for, and determining the funding status of defined benefit pension plans can be extremely challenging. Accountants, who are charged with fairly presenting information about pension plans' assets and obligations in the financial statements, often rely on actuarial experts who conduct complex analyses to estimate the magnitude of future obligations and their present values, as well as expected return of plan assets. Many estimates come into play, because information about the future is unknown when an employee's service is being rendered, financial reports are being prepared, and a plan's funding status is being evaluated.