Pension Underfunding and the Expected Return on Pension Assets: The Impact of the 2008 Financial Crisis

We use the 2008 crisis as an exogenous shock to the pension funding status of U.S. corporate defined benefit (DB) pension plans to examine the causal impact on the assumption of the expected return on pension assets (ER). Contrary to prior literature, we find that DB pension plans transitioning from fully funded to underfunded status make expense-reducing assumptions by increasing their ER. The funding deterioration conservatively generates a 39-59 basis points increase in ER, reducing the pension accounting expense by $5.3 to $8 million. Our results are robust to controlling for the shock induced by the global financial crisis on corporate performance.

Keywords: Defined benefit pension plans, pension assumptions, EROA, PPROR, underfunded.

JEL Classification: G11, G23, G32

Suggested Citation: Suggested Citation

Michaelides, Alexander and Milidonis, Andreas and Papakyriakou, Panayiotis, Pension Underfunding and the Expected Return on Pension Assets: The Impact of the 2008 Financial Crisis (April 5, 2022). Available at SSRN: https://ssrn.com/abstract=3343781 or http://dx.doi.org/10.2139/ssrn.3343781