Expected Benefit Payments and Asset Allocation in Defined Benefit Plans Post-SFAS 132(R)

Abstract

SYNOPSIS We contribute to the literature examining defined benefit pension plan asset allocation in the post-SFAS 132(R) reporting environment. SFAS 132(R) requires firms to disclose the expected annual pension benefit payments, thus providing a direct way to measure pension plan payout horizon. Controlling for previously documented determinants of pension asset allocation, we find evidence that a payout horizon measure constructed from SFAS 132(R) disclosures is associated with the firm's pension investment decisions. Specifically, we document that firms with a greater proportion of pension obligations due in the short horizon allocate a smaller portion of their plan assets to equity investments. Additionally, we provide evidence that our proposed measure explains asset allocation over and above previously used proxies representing plan horizon, confirming the usefulness of the 132(R) mandated disclosures.

Earnings, Mergers and Acquisitions Under Pension Disclosure Standards

“…Our work is also related to a number of early studies on the management of pension assumptions and actuarial choices (Blankley and Swanson, 1995;Amir and Benartzi, 1998;Asthana, 1999). In particular, Amir and Benartzi (1998) argue that if managers' pension assumptions are unbiased, cross-sectional differences in expected returns can only be explained by differences in the riskiness of companies' portfolios.…”

Auditors’ Use of In‐House Specialists

“…First, companies with defined benefit plans must engage a qualified pension actuary to value the pension liability, and auditors typically rely on specialists to audit these estimates. Second, as mentioned by Anantharaman [2017, p. 1262], “the very features of pension accounting that necessitate a specialist's involvement—its complexity, the long‐term nature of pension benefits, and the judgment involved in assumption‐setting—also make it susceptible to opportunistic reporting.” Third, there is evidence that managers choose actuarial assumptions strategically to overstate the plans’ funded status, understate the plan's costs, and manage earnings (Feldstein and Morck [1983], Blankley and Swanson [1995], Amir and Gordon [1996], Asthana [1999], Bergstresser, Desai, and Rauh [2006], Chuk [2013], Anantharaman [2017]). Finally, among several actuarial assumptions, the discount rate (used to bring projected future benefit payments to present value to estimate the pension liability) is an important and subjective estimate (Anantharaman [2017]).…”

Pension discount rate, executive stock-based compensation and investor sentiment

“…higher pension discount rate) are associated with firms' debt levels. Blankley and Swanson (1995) examine both the ERR and the pension discount rate over the period 1987-1993. Although they fail to document that firms manipulate the reported ERRs, they find that firms opportunistically use the discretion in estimating the pension discount rates by not immediately adjusting them for declines in the rates on high-quality corporate bonds, Pension Benefit Guaranty Corporation (PBGC) rates or the 30-year government bond rate.…”