The effect of financial constraints and political pressure on the management of public pension plans

Eaton, Tim V.; Nofsinger, John R.

doi:10.1016/j.jaccpubpol.2004.04.001

Cited by 71 publications

(54 citation statements)

References 20 publications

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“…Bias in assumptions in the US was found to be lower after the Sarbanes-Oxley Act (Comprix and Muller 2011). These issues are not specific to private sector companies: Eaton and Nofsinger (2004) observed that US public sector pension plans vary assumptions in order to manage pension costs, with reference to political pressure and financial constraints. In contrast, Naughton et al (2015) found that assumptions used to value the liabilities of a US state's pension plans depended on the financial well-being of the state.…”

Section: Management Discretion and Pension Accounting Numbers -Academmentioning

confidence: 99%

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

Billings

O’Brien

Woods

et al. 2016

Accounting and Business Research

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We use a panel data set of UK-listed companies over the period 2005 to 2009 to analyse the actuarial assumptions used to value pension plan liabilities under IAS 19. The valuation process requires companies to make assumptions about financial and demographic variables, notably discount rate, price inflation, salary inflation, and mortality/life expectancy of plan members/beneficiaries.We use regression analysis to analyse the relationships between these key assumptions (except mortality, where disclosures are limited) and companyspecific factors such as the pension plan funding position and duration of pension liabilities. We find evidence of selective 'management' of the three assumptions investigated, although the nature of this appears to differ from the findings of US authors. We conclude that IAS 19 does not prevent the use of managerial discretion, particularly by companies whose pension plan funding positions are weak, thereby reducing the representational faithfulness of the reported pension figures. We also highlight that the degree of discretion used reflects the extent to which IAS 19 defines how the assumptions are to be determined. We therefore suggest that companies should be encouraged to justify more explicitly their choice of assumptions.

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Section: Management Discretion and Pension Accounting Numbers -Academmentioning

confidence: 99%

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

Billings

O’Brien

Woods

et al. 2016

Accounting and Business Research

View full text Add to dashboard Cite

show abstract

“…One of the explanations may be that plans with liberal contribution requirements are likely to accrue higher unfunded liabilities in the past than those less generous plans (Coggburn & Kearney, 2010). Another reason is from the actuarial perspective: since the ARC is actuarially calculated, a higher contribution percentage indicates a wider gap between pension assets and liabilities (Eaton & Nofsinger, 2004;Peng, 2004). Therefore, plans with more unfunded liabilities are required to assume higher contribution rates in order to ameliorate the poor funding practices in the past.…”

Section: Fulfillments Of Contributionsmentioning

confidence: 99%

“…Based on the literature review, the governments that are under higher fiscal pressure tend to fund their pension plans at lower levels, which would worsen the financial status of public pension systems (Chaney, Copley, & Stone, 2002;Coggburn & Kearney, 2010;Eaton & Nofsinger, 2004;McCue, 1994). Followed the previous practices (Reck, Wilson, Gotlob, & Lawrence, 2001;Wilson, 1983;Wilson & Howard, 1984), the indicator selected in this study for the fiscal stress is the excess/deficiency of revenue over/under expenditure (total account at city level year end) per 1,000 populations.…”

Section: Financial Factorsmentioning

confidence: 99%

Sustainable Public Pension System for Florida Local Governments: Financial Solvency, Paradigm Switch, and Interperiod Equity

Cong¹

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Incremental changes to amend the existing defined benefit plans (DB plans), and the pension model switch from the DB model to defined contribution plans (DC plans).This study aims to uncover reform strategies to cope for public pension systems. The results suggest that incremental reform strategies that reduce benefits and increase contributions are not effective in improving the financial solvency of public DB plans. The alternative reform approach-the DB-to-DC transition-is attractive to local governments because it will relieve the employer of the pension cost burden and transfer the investment risk to employees themselves. The transition is also politically palatable because the taxpayer sentiment is not supportive of what are perceived to be generous retirement benefit of public employees. Meanwhile, local governments are hesitant to implement the paradigm switch due to prohibitive transition costs, political pressure, and perhaps more importantly, the potential negative impacts to public recruitment and retention. Local officials do not perceive a reduction of morale with the two-tier benefit structure at the present time; they believe this issue will solve itself along the retirement of senior employees.

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“…Furthermore, if states face fi scal limitations that restrict borrowing, pension fund debt may act as a substitute (Novy-Marx and Rauh 2009). Fiscal constraints also cause states to manipulate actuarial assumptions to lower required contributions (Eaton and Nofsinger 2004). Public pension plans are regulated by the government standard (GASB 25), which allows liabilities to be discounted at the assumed plan rate of return, which most commonly is 8 percent.…”

Section: Factors Affecting Pension Funds Risk-taking Policymentioning

confidence: 99%

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The effect of financial constraints and political pressure on the management of public pension plans

Cited by 71 publications

References 20 publications

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

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

Sustainable Public Pension System for Florida Local Governments: Financial Solvency, Paradigm Switch, and Interperiod Equity

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