The Value and Credit Relevance of Multiemployer Pension Plan Obligations

Abstract

We investigate whether multiemployer defined-benefit pension plan (MEPP) underfunding is priced by shareholders and creditors. Prior to the FASB's new MEPP standard (effective December 2011), when the disclosures on such plans were sparse, we find evidence (some evidence) that our estimate of a firm's share of MEPP underfunding is credit (value) relevant. We also find some evidence that a proxy for the funded status of a firm's MEPPs is incrementally value relevant over and above the firm's cash contributions, but no evidence that it is credit relevant. Furthermore, an estimate of MEPP underfunding that incorporates the additional disclosures required under the new MEPP standard is value and credit relevant, both individually and incrementally, over and above our old estimate. Overall, our findings suggest that shareholders and creditors view MEPP underfunding as a debt-like obligation and that the additional MEPP disclosures under the new standard are useful to market participants.

The Effect of Regulations on Pension Risk Shifting: Evidence from the US and Europe

“…Apart from guaranteeing the pension benefits for single‐employer pension plans (SEPP), the agency also provides financial assistance to multiple‐employer pension plans (MEPP). MEPPs are retirement plans negotiated by a labor union with a group of employers typically in the same industry, and have historically been considerably more underfunded than SEPPs (Chen et al., ). Whether MEPP sponsors have strong risk shifting incentives remains unexplored in this study.…”

Compliance With Pension-Related Mandatory Disclosures and Debt Financing

“…Additionally, since a firm's share of underfunding in multi-employer plans is credit relevant (i.e. it is useful in predicting a firms' probability of default) (Chen, Martin, Mashruwala, & Mashruwala, 2015), relevant required disclosures could also affect a firm's credit assessment. Finally, a reduction in information risk (or information uncertainty), due to increased pension-related disclosure could mitigate the negative effect of pension deficits (Chen, 2015).…”

Compliance with pension‐related mandatory disclosures and debt financing

“…Additionally, since a firm's share of underfunding in multi‐employer plans is credit relevant (i.e. it is useful in predicting a firms’ probability of default) (Chen, Martin, Mashruwala, & Mashruwala, 2015), relevant required disclosures could also affect a firm's credit assessment. Finally, a reduction in information risk (or information uncertainty), due to increased pension‐related disclosure could mitigate the negative effect of pension deficits (Chen, 2015).…”