Mountain or Molehill? The Pervasiveness of Overstated Earnings Through the Expected Rate of Return on Defined Benefit Pension Plan Assets

2008 ◽  
Author(s):  
Brian John Adams ◽  
Mary Margaret Frank ◽  
Tod Perry
Keyword(s):  
Pension Plan ◽  
Rate Of Return ◽  
Defined Benefit ◽  
Defined Benefit Pension Plan

The Potential for Inflating Earnings through the Expected Rate of Return on Defined Benefit Pension Plan Assets

2011 ◽  
Vol 25 (3) ◽  
pp. 443-464 ◽  
Author(s):  
Brian Adams ◽  
Mary Margaret Frank ◽  
Tod Perry
Keyword(s):  
Financial Reporting ◽  
Asset Allocation ◽  
Cumulative Effect ◽  
Pension Plan ◽  
Pension Plans ◽  
Rate Of Return ◽  
Defined Benefit ◽  
Operating Income ◽  
Defined Benefit Pension Plan ◽  
Reported Earnings

SYNOPSIS Using a sample of firms over the period of 1991 through 2005, we examine the opportunity that exists for firms to inflate earnings through the expected rate of return (ERR) assumption associated with defined benefit pension plans. The evidence suggests that, on average, the ERR is not overstated relative to several benchmarks, including contemporaneous actual returns, historical cumulative actual returns, and expected future returns based on asset allocation within the pension. We also find that actual changes in the ERR are infrequent and typically have less than a 1 percent impact on annual operating income. We also estimate that a 0.5 percent change (50 bps) in the ERR will result in a cumulative effect on operating income over a five-year period of approximately 0.5 percent or less for the majority of firms. When we examine firms with the highest ERRs or with the greatest opportunity to inflate earnings, again, we find that the ERR is not overstated relative to several benchmarks. Although we do not observe pervasive inflating of reported income through the ERR during our sample period, we do find that for some firms, small increases in ERR can have a material impact on reported earnings. Our results provide evidence related to the pervasiveness, materiality, and impact of overstated earnings through the ERR, which helps regulators assess the costs and benefits of eliminating this discretion in financial reporting.

Getting More from Less in Defined Benefit Plans

2018 ◽  
Author(s):  
Daniel W. Wallick ◽  
Daniel B. Berkowitz ◽  
Andrew S. Clarke ◽  
Kevin J. DiCiurcio ◽  
Kimberly A. Stockton
Keyword(s):  
Interest Rates ◽  
Pension Plan ◽  
Defined Benefit ◽  
Portfolio Risk ◽  
Defined Benefit Pension Plan ◽  
Increased Risk ◽  
Investment Returns ◽  
Defined Benefit Plans ◽  
Asset Class ◽  
Reduced Costs

As global interest rates hover near historic lows, defined benefit pension plan sponsors must grapple with the prospect of lower investment returns. We examine three levers that can enhance portfolio outcomes in a low-return world: increased contributions; reduced investment costs; and increased portfolio risk. We use portfolio simulations based on a stochastic asset class forecasting model to evaluate each lever according to two criteria: the magnitude of impact and the certainty that this impact will be realized. We show that increased contributions have the greatest and most certain impact. Reduced costs have a more modest, but equally certain impact. Increased risk can deliver a significant impact, but with the least certainty.

scholarly journals The missing link: economic exposure and pension plan risk

2015 ◽  
Vol 9 (2) ◽  
pp. 290-303
Author(s):  
Paul Sweeting ◽  
Alexandre Christie ◽  
Edward Gladwyn
Keyword(s):  
Asset Allocation ◽  
Pension Plan ◽  
Asset Returns ◽  
Oil Price ◽  
Defined Benefit ◽  
Financial Health ◽  
Defined Benefit Pension Plan ◽  
Asset Class ◽  
Normal Shape ◽  
The Impact

AbstractThe funding position of a defined benefit pension plan is often closely linked to the performance of the sponsoring company’s business. For example, a plan sponsor whose financial health is dependent on high oil prices may struggle during periods of oil price weakness. If the pension plan’s assets perform poorly at this time, the ability of the sponsor to address any funding requirement could be restricted precisely when the need for funding is heightened. In this paper, we propose an approach to dealing with joint plan and sponsor risk that can provide protection against extreme adverse events for the sponsor. In particular, adopt a strategy of minimising a portfolio’s expected losses in the event of an assumed drop of x% in the oil price. Our methodology relies on an asset allocation framework that takes into account the impact of serial correlation in asset returns, as well as the negative skewness and leptokurtosis resulting from the non-normal shape of marginal distributions of historical asset returns. We also make use of copulas to measure the dependence between asset class returns.

Financial health and the valuation of corporate pension plans

2019 ◽  
Vol 19 (4) ◽  
pp. 459-490
Author(s):  
Jun Cai ◽  
Miao Luo ◽  
Alan J. Marcus
Keyword(s):  
Property Rights ◽  
Pension Plan ◽  
Pension Plans ◽  
Defined Benefit ◽  
Financial Health ◽  
Valuation Effects ◽  
Defined Benefit Pension Plan ◽  
Corporate Pension ◽  
Standing Question

AbstractWe return to the long-standing question ‘Who owns the assets in a defined benefit pension plan?’ Unlike earlier studies, we condition the market's assessment of implicit property rights on the sponsoring firm's financial health. Valuations of financially strong firms, and those that are strengthening, are more responsive to pension plan funding. For these firms, each extra dollar of net plan assets is valued at between $0.50 and $1.00. In contrast, for weak and weakening firms, valuation effects are statistically indistinguishable from zero. This result is consistent with the higher likelihood that they will renege on their pension obligations.

scholarly journals Defined benefit pension plan distribution decisions by public sector employees

2014 ◽  
Vol 116 ◽  
pp. 73-88 ◽  
Author(s):  
Robert L. Clark ◽  
Melinda Sandler Morrill ◽  
David Vanderweide
Keyword(s):  
Public Sector ◽  
Pension Plan ◽  
Defined Benefit ◽  
Defined Benefit Pension Plan ◽  
Public Sector Employees
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