An Empirical Examination Of Pension Rate Estimates: A Benchmark Approach

In this paper, we analyze pension rate choices for a sample of 495 firms over the thirteen-year period from 1994-2006. In recent years, articles have appeared in business publications alleging abuse of the discretion afforded to management in setting pension rates, particularly the pension discount rate and expected rate of return on plan assets. We find that pension discount rate estimates and expected rate of return estimates generally comply with the authoritative requirements, although there appears to be a smoothing effect in setting pension discount rates as well as a lag in fully reflecting economic conditions. We find evidence consistent with discount rate choice being influenced by deteriorating economic conditions, and possibly passage of the Sarbanes-Oxley Act. We also find that, in general, firms’ expected rate of return assumptions tend to reflect their long-run internal rates of return on pension assets, although the recessionary influences in the early 2000s were not fully reflected in the expected rates of return toward the end of our test period. There is also a sizeable minority of firms (approximately 27%) for which their expected rates of return on plan assets consistently overstate their actual, long-run returns

Rational Prediction Of Future Pension Expense: A Simulation Approach

Because future pension expense can have a material influence on a firm’s future earnings, financial analysts are faced with the difficult task of forecasting its impact.  The purpose of this paper is to demonstrate a model that can be used with a simulation approach to predict future pension expense and its associated uncertainties.  Because of the importance and complexity of the pension expense component in the estimate of future earnings, a simulation model acts as a powerful analytical tool that can give the analyst greater confidence as to the magnitude and variability of future pension expense

Complex Cooperative Learning Structures for College and University Courses

Instructors who have succeeded with cooperative learning in their classrooms may wish to move beyond the basics of structured small group work to more complex techniques which enable them to simultaneously meet multiple teaching objectives. This paper describes cooperative learning structures which not only help students learn course material but also enhance their learning skills. Instructors who use complex cooperative learning structures prompt their students to teach, to question, and to evaluate the learning of their peers

An Examination Of The Economic Impact Of Pension Rate Reductions On Future Pension Expense, Earnings, And Cash Flows: A Simulation

In this paper, we develop a two-period analytical model of pension cost, which allows us to simulate pension expense and the associated earnings impact. These estimates are important because they provide information to the market, and because they are useful in estimating future cash flows or for other analytical purposes. This is especially true now, because the economic environment has deteriorated to a point that many investors perceive increased uncertainty with respect to pension plans and the effect they have on future income. Some plan sponsors have not been faced with pension plan losses for over a decade or longer, having enjoyed reduced or eliminated funding holidays as a result of high returns to pension plan assets. Given the current economic climate, however, these results (boosts to earnings due to pension credits and reduced or eliminated funding requirements) may change abruptly. In fact, several authors in the popular financial press have speculated on the impact of such fundamental changes in pension assets, liabilities and estimates. We simulate the potential results for two periods in the future based upon percentiles drawn from a sample of 1,116 firms taken from Compustat. We compute projected pension expense for the 25th percentile firm, the median firm, and the 75th percentile firm by varying the discount rates, expected rates of return, and actual asset return assumptions. Our results indicate that while the pension expense effect is large in both periods across small, mid-sized and large firms, large firms show the greatest increase in pension expense. Interestingly, however, the earnings impact is the smallest for large firms in both periods, and is not material in period one for both large and mid-sized firms. It is material for small firms. Firms with small pension plans appear to have the greatest earnings drag both one and two years into the future. In period two, all firms face significantly greater expense and earnings reductions, although again, smaller firms face the greatest impact. In addition, all firms face significantly increased cash funding requirements in order to prevent funding ratios (plan assets scaled by pension liabilities) from deteriorating. These results suggest not only future earnings reductions form pension rate changes, but also a potential cash flow impact as well