An empirical study of the effects of managerial discretion over the extended adoption of new UK employers' pension accounting rules

Abstract

On 30 November 2000, the Accounting Standards Board issued Financial Reporting Standard 17(‘Retirement Benefits’, FRS 17) to supersede Statement of Standard Accounting Practice (‘Accounting for Pension Costs’, SSAP 24). It removed managerial discretion over the main actuarial assumptions used to estimate employers’ pension obligations, and required the recognition of pension assets and liabilities on a consistent ‘fair value’ basis. However, FRS17 was only fully effective for reporting periods ending on or after 30 June 2005. This thesis examines empirically how the prolonged period associated with the debate, promotion and implementation of FRS17 interacted with various managerial pension choices. Evidence of these interactions can help discriminate among competing theoretical perspectives concerning employers’ long-term defined benefit pension obligations. This thesis draws upon these competing theoretical frameworks to develop and test hypotheses concerning the impact of pension accounting regulatory change on UK firms’ discretion over pension actuarial assumptions, termination and asset allocation during the period 1998 – 2002. The empirical results support three major hypotheses. Firstly, the magnitude of expected rate of return on pension assets assumption used for financial reporting purposes is driven primarily by the UK firms’ balance sheet leverage. Secondly, firms’ defined pension benefits termination decision is inter-related with their pension financial reporting choices. Thirdly, the allocation of pension assets has been managed in a way to reduce firms’ cash contribution risks that stem from measuring both pension assets and liabilities on a ‘fair value’ basis. These findings imply managerial discretionary behaviour related to these choices is consistent with the perspective that employer firms and their sponsored pension funds are an integrated economic entity, as is asserted by the new UK pension accounting rule (FRS 17)