Corporate Pension Plan Funding Levels and Pension Assumptions

63 Pages Posted: 4 Mar 2019 Last revised: 12 Jun 2019

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: February 27, 2019

Abstract

We use a difference-in-differences approach to examine the causal impact of changes in the funding ratios of U.S. corporate defined benefit (DB) pension plans on the assumption of expected return on pension assets (EROA). We use the 2008 crisis as an exogenous shock to the annual pension funding ratios and find that DB pension plans transitioning from fully funded to underfunded status over this period, make significant obligation-reducing assumptions (increase EROA) for corporate plan sponsors. The funding deterioration generates a 40-80 basis points’ increase in EROA, which corresponds to an average annual reduction in pension contributions of 8% to 15%.

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 Pension Assumptions (February 27, 2019). 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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