Cash Balance Pension Plan Conversions: An Analysis of Motivations and Pension Costs

39 Pages Posted: 16 May 2004 Last revised: 19 Dec 2012

See all articles by Julia D'Souza

Julia D'Souza

Cornell University - Department of Accounting

John Jacob

University of Colorado at Boulder - Department of Accounting

Barbara A. Lougee

University of San Diego School of Business

Date Written: December 18, 2012

Abstract

In recent years, many corporations have replaced their traditional defined benefit (DB) pension plans with “cash balance” (CB) plans, which share many of the characteristics of defined contribution plans. This study provides empirical evidence on the characteristics of CB converters and the behavior of pension costs and obligations pre- and post-conversion. We find that CB converters are larger than firms that retain traditional DB plans as well as those that terminate DB plans. They are less profitable than the former, but more profitable than the latter. CB conversions are not associated with proxies for greater labor mobility (e.g., firm-specific employee turnover rate). They are associated with a workforce that is closer to retirement, on average, lending credence to the breach of implicit contract rather than the labor market hypothesis as a motivator of CB conversions. Consistent with this intuition, we document that CB converters recognize a reduction of unrecognized prior service costs in the year of conversion, consistent with a negative plan amendment. Unlike pre-conversion, pension costs and obligations are significantly lower for CB firms post-conversion than for a matched sample of firms retaining traditional DB plans. CB conversions are more popular than DB plan terminations among firms with overfunded pension plan assets in periods when expected return on plan assets is likely to be high, with a consequent positive effect on reported income.

Keywords: cash balance plans, pension plans, pension conversions, postretirement benefits, implicit contracts, SFAS 87

JEL Classification: M41, D31, J32, M50

Suggested Citation

D'Souza, Julia M. and Jacob, John and Lougee, Barbara, Cash Balance Pension Plan Conversions: An Analysis of Motivations and Pension Costs (December 18, 2012). AAA 2009 Financial Accounting and Reporting Section (FARS) Paper. Available at SSRN: https://ssrn.com/abstract=546843 or http://dx.doi.org/10.2139/ssrn.546843

Julia M. D'Souza

Cornell University - Department of Accounting ( email )

Ithaca, NY 14853
United States
607-255-2349 (Phone)
607-254-4590 (Fax)

John Jacob

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States
303-735-6335 (Phone)

Barbara Lougee (Contact Author)

University of San Diego School of Business ( email )

227 Coronado Hall
5998 Alcalá Park
San Diego, CA
United States
619.260.7892 (Phone)
619.260.7725 (Fax)

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