Economic effects of the decline in defined benefit pension funding from surpluses to deficits

The recent decline in funding levels of defined benefit pension plans (DBPs) has attracted the attention of regulators in Australia and other jurisdictions. In light of such scrutiny, this study provides timely empirical evidence of the economic and regulatory implications of the recent change in the financial position of DBPs sponsored by Australian listed companies. We identify that over the four-year period from 2000 to 2003 the frequencies of both accrued benefits deficits and vested benefits deficits increased sharply after 2001. Coinciding with the increased incidence of deficits, the time lag in measuring accrued and vested benefits declined significantly. Controlling for firms taking contribution holidays, we find that the market prices vested benefits surpluses and deficits, and accrued benefits deficits, but not accrued benefits surpluses. This asymmetric treatment of firms? superannuation funding positions is consistent with accounting conservatism theories and, as a consequence, has implications for recent adoption of IFRS accounting standards requiring Australian companies to recognise both accrued benefits surpluses and deficits.