Ideally the party who drafted the PFS has the foresight to anticipate all such questions, and provide explicitly for them in the instructions. If the instructions to the PFS in question are silent as to retirement funds, that's poor drafting.
That aside, I tend to take the approach of disclosing / including anything which isn't explicitly exempted by the instructions. I act as if the general (if unspoken) understanding between the PFS preparer and the creditor is that the purpose of the form is to disclose all assets and liabilities. If the creditor wants a certain type or class of asset or debt omitted from the form, the instructions will so state.
I take that approach because it's impossible for every conceivable type of asset or debt to be called for in the instructions. By your client's rationale, any asset not explicitly called for in the PFS instructions could be omitted. And unless the instructions are 49 pages of fine print, there are certainly a number of asset types not explicitly mentioned therein. Hence it's more realistic for the instructions to serve as a guide to what may be omitted, with all else to be included on the PFS by default.
Hence I agree with you on the first point. Still, since retirement funds are such a ubiquitous asset class, they should certainly have been addressed in the instructions.
I also think your client's argument on the second point is even weaker than on the first matter. By his logic (borrowing against an asset converts the asset to a liability) then, conversely, making a payment against a debt converts that debt to an asset.
As always, be wary of clients who approach PFS preparation the way a novelist approaches his work: Creating a certain "story" through the use of fiction, in order to trigger a certain targeted psychological response on the part of the reader.