What is the Pension Liabilities and Pension Assets?

Pension Liabilities is the value of the employer’s obligation to make future pension payments to current and retired employees based on or related to services yet to be performed (unlearned benefits) but excludes anticipated to those to be employed in the future.

This definition is only one of the several possible definitions of pension liability. It cannot be demonstrated to be a “true” definition as accountants never agreed on what constitutes a “true” liability. Yet, as will be seen, this definition is analytically useful. It corresponds to the actuarial concept of “present value of benefits to be paid,” and is relatively easy to measure.

Pension Assets is the value of the expected future employee services for which part of the pension liability has been incurred.

When an individual is employed, a pension liability arises immediately. There arises at the same time a pension asset, which may normally be supposed to equal the pension liability. At the time when an employee retires, the pension liability will have grown larger because of the time value of money, but the pension asset will have decreased to zero.

How pension liability and pension assets are calculated?

Pension Assets - Pension Obligations = Pension Liability

References:

• Philips, G. (1968). Pension Liabilities and Assets. The Accounting Review, 43(1), 10–17. Retrieved May 3, 2020, from www.jstor.org/stable/244111
• https://www.khanacademy.org/humanities/us-government-and-civics/american-civics-parent/american-civics/v/pension-obligations