Pension Accounting: Forecasts for the Company's Own Balance Sheet as Well as Profit and Loss Account

Pension Accounting: Forecasts for the Company's Own Balance Sheet as Well as Profit and Loss Account

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Under IFRS and US GAAP accounting standards, employers must disclose the gap between their plan assets and liabilities on the company’s own balance sheet as well as the corresponding impact on the company’s profit and loss (P&L) account. The pension liabilities depend on a discount rate based on the corporate bond yield of a pension fund specific liability duration. Swiss corporate bond yields were very volatile during the year 2019 and substantially decreased to their historical lows. In August 2019 discount rates based on corporate bond yields were negative for all typical pension fund liability durations (17-20 years). To support companies in planning for the financial year-end and preparing budgets for the next years, it is worth estimating positions of the company’s own balance sheet as well as P&L account over the next 2-3 years using a stochastic term-structure model to set up the pension fund specific discount rate. Our approach implements the nested stochastic modelling for pension fund liabilities based on a stochastic affine term-structure model (for the yield curve). The distribution of the company’s own balance sheet as well as P&L account positions over the next 2-3 years on a quarterly basis will help companies prepare their budgets in advance.

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