The Expected Rate of Return on Pension Funds and Asset Allocation as Predictors of Portfolio Performance
The Accounting Review, Vol 73, No 2, April 1998
Posted: 20 Apr 1998
SFAS No. 87 (Employers' Accounting for Pensions) requires corporations to disclose the long-term expected rate of return on pension assets (ERR) and the composition of assets held in the pension portfolio. Recently, the FASB has issued SFAS No. 132 eliminating the requirement to disclose asset composition. The Board has considered the claim that, in practice, asset composition and certain other pension disclosures provide only limited useful information to users of financial statements. The Board has also considered the AICPA's recommendation that "standard setters should search for and eliminate less relevant disclosures." Given the prevalent practice of vague pension asset composition disclosures and the need to control the cost of preparing and disseminating financial disclosures, the FASB has decided to eliminate asset composition disclosures and to retain the disclosure of the ERR.
We examine the relevance of disclosures of pension asset composition and of the ERR. We adopt the FASB's notion that relevant pension information should be useful in forecasting pension benefits or costs in future periods. We implement this approach by investigating the ability of both ERR and pension asset composition to predict the return on pension assets. Our main finding is that only asset composition, measured as the percent of pension assets invested in equity securities (%Equity), is correlated with future pension returns. Our results suggest that the FASB should consider the enforcement rather than elimination of current disclosure requirements regarding pension asset composition.
JEL Classification: M41, M45
Suggested Citation: Suggested Citation