Changes in the Funded Status of Retirement Plans after the Adoption of SFAS No. 158 : Economic Improvement or Balance Sheet Management?

Statement of Financial Accounting Standards No. 158 (SFAS 158) requires companies to report the funded status of retirement plans on the balance sheet for fiscal years ending after December 15, 2006. Prior to this, the average retirement plan was underfunded, and after the adoption of SFAS 158 this underfunding decreased. In this study, I investigate management's incentives to improve the funded status. I develop a comprehensive model using hand-collected data of all sources of the change in the funded status of retirement plans, including both changes to accounting assumptions and structural changes (such as plan amendments or freezes). I find that companies with a large unrecorded pension liability and smaller companies had an improvement in their pension plan funded status due to managers making obligation decreasing actuarial assumptions, as well as taking actions that affected the underlying structure of the plan. In addition, I find that managers of companies with debt contracting incentives responded to the adoption of SFAS 158 by opportunistically selecting actuarial assumptions to increase the funded status; however, I find no evidence that they responded by altering the structure of their pension plans. This is expected as these companies often have a strong union presence and therefore a limited ability to amend a plan or freeze benefits. These results highlight the importance of considering collective bargaining and other outside pressures faced by managers of debt constrained companies because managers of these companies may be unable to respond to changing accounting standards by taking real actions