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Determinants of expected rate of return on pension assets: evidence from the UK

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  • Yong Li
  • Paul Klumpes

Abstract

This study explores whether UK managers behaved opportunistically when determining the expected rate of return on pension assets (ERRs) during an extended period of major changes in pension accounting rules (1998--2002), and whether this behaviour changed with the transitional adoption of FRS 17. The empirical results support the contracting hypothesis that UK firms with tightening debt covenants inflated their reported ERRs over this period. The contracting cost incentive underlying reported ERRs appears to be stronger during the FRS 17 transitional adoption period, and ERRs were used jointly with salary growth rate to manage balance sheet leverage. One important implication of our findings is that the IASB's 2011 revision to IAS 19, Employee Benefits, which removed the flexibility that firms could exercise in selection of ERR assumptions, potentially improves the reliability of reported pension cost components.

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  • Yong Li & Paul Klumpes, 2013. "Determinants of expected rate of return on pension assets: evidence from the UK," Accounting and Business Research, Taylor & Francis Journals, vol. 43(1), pages 3-30, February.
    • Handle: RePEc:taf:acctbr:v:43:y:2013:i:1:p:3-30
    DOI: 10.1080/00014788.2012.685286
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    Cited by:

    1. Luca Larcher & Francis Breedon, 2020. "Discounting and the market valuation of defined benefit pensions," Working Papers 932, Queen Mary University of London, School of Economics and Finance.
    2. Kusano, Masaki, 2023. "Does recognition versus disclosure of pension liabilities affect credit ratings? Evidence from Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    3. Fahad, Nafiz & Ma, Nelson & Scott, Tom, 2020. "The consequences of discount rate selection for defined benefit liabilities," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(1).
    4. Masaki KUSANO, 2022. "Recognition versus Disclosure and Managerial Discretion: Evidence from Japanese Pension Accounting," Discussion papers e-22-008, Graduate School of Economics , Kyoto University.
    5. Martin Glaum & Tobias Keller & Donna L. Street, 2018. "Discretionary accounting choices: the case of IAS 19 pension accounting," Accounting and Business Research, Taylor & Francis Journals, vol. 48(2), pages 139-170, February.

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