American Pension Funds

YAmerican Pension Funds performed extremely well during stock market boom of the 1990s prompting both institutional and individual investors to bet their savings in the stock market. The corporates went even a step further and ignored the basic accounting principle of Conservatism and assumed discount rate that suited them best when calculating their pension liabilities. The stock market decline of latter 2000 wiped off all the gains of the previous years. The use of higher interest rates to discount future liabilities may have two opposing effects. On one hand they would reduce sponsor's contribution. Thus improve their financial position and decreases their likelihood of bankruptcy. On the other hand, lower contributions would mean under funding of pension funds. Thus increasing the likelihood that the fund will be bailed out/taken over by a government agency.

The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire corpus after retirement.