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

71 Pages Posted: 4 Mar 2019 Last revised: 15 Jul 2022

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

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Date Written: April 5, 2022

Abstract

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

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

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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