Predicting Defined Benefit Pension Returns : The Impact of SFAS 132 Required Disclosure of Asset Allocation Information

We evaluate the impact of Financial Accounting Standard 132 by measuring how well its required asset allocation information predicts next year's pension returns. We compare the predictive capability of several different models, including Sharpe's style model and survey data by Pensions & Investments. Predictions based on SFAS 132 data are no better than the empirically based STYLE model predictions and statistically inferior to the SURVEY predictions. We recommend that pension returns be reported quarterly to bolster the power of the STYLE model and that additional asset classes be required, such as international equity, private equity and hedge funds. We also show the importance of reporting exposure to individual securities such as the company's own stock to enhance predictive capability as well as to inform analysts about the risk profile of pension assets