Corporate Pension Plan Funding Levels and Pension Assumptions

57 Pages Posted: 18 Mar 2019

See all articles by Alexander Michaelides

Alexander Michaelides

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

Panayiotis Papakyriakou

University of Southampton - Department of Banking and Finance

Andreas Milidonis

University of Cyprus

Multiple version iconThere are 2 versions of this paper

Date Written: March 2019

Abstract

We use a difference-in-differences approach to examine the causal impact of the funding ratios of U.S. corporate defined benefit (DB) pension plans on the assumption of expected return on pension assets (EROA). To make the causal case, we use the 2008 global financial crisis as an exogenous shock to the funding ratio of DB pension plans, and the simultaneous implementation of the Pension Protection Act, which emphasized the accountability of underfunded pension plans. We find that DB pension plans making the transition from fully funded to underfunded status over this period significantly revise their EROA assumption upward. The upward revisions in EROA are economically significant and generate obligation-reducing outcomes for corporate plans sponsors: a switch from fully funded to underfunded status generates at least a 40 (and up to a 80) basis point increase in EROA, which, in turn, corresponds to an average annual reduction in pension contributions of $6 (to $11) million.

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

JEL Classification: G11, G32, J32

Suggested Citation

Michaelides, Alexander and Papakyriakou, Panayiotis and Milidonis, Andreas, Corporate Pension Plan Funding Levels and Pension Assumptions (March 2019). CEPR Discussion Paper No. DP13591. Available at SSRN: https://ssrn.com/abstract=3354458

Alexander Michaelides (Contact Author)

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

Panayiotis Papakyriakou

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

Southampton
United Kingdom

Andreas Milidonis

University of Cyprus ( email )

75 Kallipoleos Street
Nicosia CY 1678, Nicosia P.O. Box 2
Cyprus

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