Corporate Pension Plans: How Consistent are the Assumptions?
Mid-American Journal of Business (11/02) Vol. 17, No. 2 p.23; Newell, Gale E.; Kreuze, Jerry G.; Hurtt, David

Noting that accounting for pension plan obligations requires companies to make certain assumptions about discount rates, future salary increases, and long-term return on assets, the authors of this article examined how the assumptions differ among firms. For plans having fewer plan assets compared to the projected benefit obligation, it is important to note that the higher the assumed rate, the lower the calculated liability, which means required contributions are smaller, as are the lump-sum payment; this means companies have incentives to go with higher discount rates, particularly for less funded pension plans. During the stock-market boom in the late 1990s, actual returns on pension plan assets were much larger than expected returns, creating large cumulative unrecognized gains for most companies, but when the market declined in 2000 and 2001, actual returns created unrecognized losses which could cause plans to appear underfunded, thus requiring higher premium payments. According to a study of 214 companies' actuarial assumptions between 1987 and 1996, the more funded plans tended to choose discount rates lower than the sample average rate, while less funded plans chose higher-than-average discount rates. The authors' new survey looked at data on a random subsample of Compustat companies that had reported the information needed for the survey and also had similar yearends. The authors ended up doubtful that the more funded plans collectively should be assuming higher discount rates and expected long-term return on plan assets, given that the actual return on plan assets did not correlate with the assumptions.


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