When is a dollar not a dollar? In a pension fund, it’s “worth” more. Suppose a company has $100m of liquid reserves earning 3 per cent. Suppose it tops up its pension with some of those reserves. Generally Accepted Accounting Principles accounting lets the company assume that the pension will earn 9 per cent. Poof! An instant $6m increase in earnings. The same dollar is suddenly “earning” three times as much for the company. And, because pension contributions are tax deductible, the after-tax “earnings” on the money quadruple. What if the pension fails to produce a 9 per cent return? Not my problem, Jack ...

What’s the logic behind allowing an assumed return as high as 9 per cent? Pensions aren’t typically invested in short-maturity deposits earning 3 per cent nor should they be. They’re invested in such things as stocks, long bonds, international markets, hedge funds and private equity. The historical record on diversified portfolios reflects a “risk premium”, rewarding the funds for bearing risk, that brings the historical return to 9 per cent or higher over long spans of time.