Corporate Pension Plan Funding Levels and the Expected Return Assumption

68 Pages Posted: 4 Mar 2019 Last revised: 2 Jul 2020

See all articles by Alexander Michaelides

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

Panayiotis Papakyriakou

University of Southampton - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 2, 2020

Abstract

We use the 2008 crisis as an exogenous shock to the annual pension funding ratios of U.S. corporate defined benefit (DB) pension plans to examine the causal impact on the assumption of expected return on pension assets (EROA). Contrary to prior literature, we find that DB pension plans transitioning from fully funded to underfunded status make significant expense-reducing assumptions for corporate plan sponsors by increasing their EROA. The funding deterioration generates a 40-80 basis points’ increase in EROA, which corresponds to an average annual reduction in the pension accounting expense of 9% to 13%. 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, underfunded, actuaries

JEL Classification: G11, G32, J32

Suggested Citation

Michaelides, Alexander and Milidonis, Andreas and Papakyriakou, Panayiotis, Corporate Pension Plan Funding Levels and the Expected Return Assumption (July 2, 2020). Available at SSRN: https://ssrn.com/abstract=3343781 or http://dx.doi.org/10.2139/ssrn.3343781

Alexander Michaelides

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

Panayiotis Papakyriakou

University of Southampton - Department of Banking and Finance ( email )

Southampton
United Kingdom

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