Determinants of Funding Strategies and Actuarial Choices for Defined‐Benefit Pension Plans*

Abstract

This paper examines the effects of firms' financial and pension profiles on their funding strafegiss and actuarial choices. The paper uses reports filed by individual pension plans -.s'ith the Department of Labor under the requirements of the Employee Retirement Income Securiry Act of 1974 for the analysis. Evidence reported in the paper shows that as firms become overfunded, they make conservative actuarial choices to avoid visibility costs, and that as firms become underfunded, they make liberal actuarial choices to avoid visibility costs. As Vat annual contributions increase relative to the jiermissible contribution ranges, finns iiSEiks conservative actuarial choices to minimize penalties and maximize tax benefits. A?, the pjinua! conlTibutions decrease relative to the permissible contribution ranges, firms make Ijberai actuarial choices to minimize penalties and maximize tax benefits. The larger the profitability, cash flow from operations, and tax liability, and the smaller the debt of ;; finri, the higher the likelihood that the firm's managers will make conservative actuarial choices ic maximize coiUributions. Conversely, the smaller the profitability, cash flow r L oin opersitions, and tax liability, aid the larger the debt of a firm, the higher the likelihood that the firm's managers will make liberal actuarial choices to minimize contributions. This evidence, which is consistent with the hypothesis of funding management, can aid the Intemal Revenue Sei"vice (IRS) in regulating the defined-benefit pension plans more effeciively and help plan beneficiaries to manage their retirement portfolios more efficiently. The debiasing method developed in the paper can provide investors and creditors with the tools to identify the discretionary components of pension liabilities and thereby value firms more efficiently.

Discretion in accounting for pensions under IAS 19: using the ‘magic telescope’?

“…We test for systematic differences in companies' choices of assumptions using multiple regression analysis on data for a panel of FTSE 350 companies reporting under IAS 19 over 2005-09, and conclude that some 4 companies appear to exercise discretion in a manner that reduces reported pension liabilities. More specifically, we confirm US findings (Thies and Sturrock 1988;Godwin 1999;Asthana 1999) that companies with relatively poorly-funded DBP plans tend to make assumptions that lower their liability valuations. We also find support for US evidence (Feldstein and Mørck 1983;Bodie et al 1987) of a relationship between assumptions and the size of the pension plan relative to the company's size.…”

“…We also find support for US evidence (Feldstein and Mørck 1983;Bodie et al 1987) of a relationship between assumptions and the size of the pension plan relative to the company's size. Our UK evidence of reporting under IAS 19 does not, however, indicate any link between pension assumptions and company profitability, or debt ratio, contrary to the findings of three US papers (Bodie et al 1987;Godwin et al 1997;Asthana 1999) and one UK paper (Li and Klumpes 2013). We therefore add to the three UK papers which provide contradictory evidence on the factors influencing the choice of assumptions used in the valuation of DBP liabilities under earlier UK standards (see discussion below of these papers: Byrne et al 2007;Sweeting 2011;Li and Klumpes 2013).…”

Decision Usefulness Approach to Financial Reporting: A Case for Employees

“…But these numbers, when used for comparing with other companies, can reveal much about the firm. The ratios are immensely important for the analysts and they are the people who ascribe value to the ratios based on their utility, (Asthana, 1999). The financial ratio makes sense only when there is a yardstick with which it is compared and employees can view the stability of the company when it ratio to compare which other competitor.…”

Determinants of Expected Returns at Public Defined-Benefit Pension Plans

“…Indeed, Hsu, Wu and Lin (2013) affirm that private firms adjust ERRs in order to change the actuarial values of pension assets and liabilities (also see Asthana (1999)). …”