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We study the potential effects of pension underfunding on corporate investment, financial constraints and improved employee bonding using 10 Pacific-Basin countries (including the United States, Australia, and eight Asian countries) at heterogeneous economic development stages and different regulatory environments. We document that corporate pensions are significantly underfunded in most countries of our sample in the period of 2001–2017, when interest rates were ultralow in most countries. In addition, firms from countries with stronger employee protection and more generous retirement benefits tend to show higher levels of underfunding in their defined benefit (DB) pension plans. To the extent of pension underfunding imposing constraints on corporate investment, we find that firms in these countries can face more constraints on investment when their pension is underfunded.

The deferred nature of retirement benefits provides public officials with a means of postponing to later years the retirement financing burden. This practice is aided by the fact that the Employee Retirement Income and Security Act of 1974 (ERISA) does not apply to the public sector. Failure to provide for full actuarial funding violates the concept of interperiod equity, which the Governmental Accounting Standards Board cites as a fundamental responsibility of public administrators. Underfunding also violates the just savings principle developed by the philosopher John Rawls. This paper examines the extent of retirement system underfunding in state and local government and considers the various ways in which underfunding imposes an unfair burden on future generations. The ethical significance of underfunding is tied to the works of Rawls, and remedial measures are proposed which are consistent with Rawls’ just savings principle.

The purpose of this paper is to examine the association between conformity with generally accepted accounting principles (GAAP) indicated by Governmental Accounting Standards Board (GASB) 34 presentation and pension underfunding in Illinois.

The authors used a fixed effects regression and employed a sample of Illinois municipalities (n=2,565 municipal-year observations) over the period 2009–2014.

The findings show that GAAP is inversely associated with pension underfunding, but only among the subsample of municipalities that are within the healthy pension funding range, i.e., above 80 percent funded. These municipalities may be in a better position to increase pension funding in response to the disciplining effect of broad GAAP conformity.

The paper focuses solely on one state and one multi-employer plan. Future studies should consider assessing the applicability of the results to other states and plan settings.

The results inform the standard-setting process, particularly as the implementation of the new GASB standards is evaluated and as GASB 34 is reexamined.

Despite concerns associated with state and local pension underfunding, academic studies examining its determinants are few. The sample setting is representative of municipal pension plans in the USA (with a comparable average pension funding ratio of 74.2 percent) and provides variability in GAAP conformity (the state encourages, but does not require, financial statement presentation consistent with GASB 34), as well as homogeneity in actuarial assumptions across observations (all sample municipalities participate in a large multi-employer municipal pension plan). The sample period immediately precedes the implementation of GASB Statements Nos 67 and 68, which increase the scope of pension reporting, providing the opportunity to consider the effects of broad GAAP conformity and a baseline for subsequent consideration of the effects of the new standards.

The surging stock market in the late nineties lifted the funding level of most pension plans and led to plan management decisions that left them vulnerable to the stock market decline of 2000-2002. In this study, an analysis was conducted on the descriptive data of 51 state pension plans for the period 1998-2003 and it was found that overfunded plans were more likely to substantially increase benefits while simultaneously reduce contributions. This led to widespread underfunding and a need for sudden increase in contributions as market conditions grew worse and funding levels dropped sharply. This investment cycle emphasizes the need for more prudent surplus management strategies to protect pension plans from the consequences of stock market volatility.

We examine and compare funding status, actuarial assumptions and asset investment allocations of defined benefit pension plans in the public and private sectors across time, using information as reported under GASB and FASB. We find that pension plans in both sectors are underfunded and that inferences about pension funding in the public sector would be different if pension assets' fair values were required in the computation of funding status. Actuarial assumptions of public employee plans appear to be both more optimistic and less variable than those of private sector plans. Finally, we document that public sector plans allocate invested assets somewhat differently than in the private sector, although our findings do not confirm anecdotal reports of riskier pension investment strategies relative to the private sector.

Public pension plans in the U.S. are seriously underfunded, especially following the financial market crisis of 2008-2009 which resulted in large investment losses. However, funding levels vary widely across plans. Pension boards of trustees make key management decisions in pension systems and these decisions have significant effects on funded levels, yet our empirical knowledge of board management is limited. This study explores the effect of board composition on pension funding levels. Existing theoretical debates lead to differing expectations, and previous studies have mixed results. Our research uses a panel data set of large public pension plans from 2001-2009. We also collect data for pension board composition from this time period. We find that increasing political appointees and employee members on the board increases the funding performance of the pension system.

The choice of accounting methods is critical in measuring the performance and sustainability of a public defined benefit pension (DBP) plan, and such measurement has an impact on the effectiveness of the entire pension system. Prior literature rarely discusses the choice and rationale of the accounting assumptions for public DBP plans. This study fills the gap by investigating whether crucial plan characteristics, including operational performance, financial health, sponsor fiscal stress, and audit quality, are associated with the accounting assumptions of public DBP plans.

The sample includes 1,170 plan-years from the intersection of the Center for Retirement Research and public DBPs' annual financial reports for the years 2001–2013. This study develops regression models to examine the relationship between the characteristics of public DBP practices and DBP accounting choices.

The empirical results show that the public DBPs that have better investment performance, higher funding status, less fiscal stress, and that are audited by Big 4 accounting firms are more likely to adopt conservative accounting choices.

The study documents the impact of crucial pension plan characteristics on public DBP managers' accounting choices, which were not extensively discussed in pension literature. The findings help us understand the rationale for employing different accounting treatments in the context of public pension fund practices. In addition, the study sheds light on policy implications for the future reform of public pension regulations.

This study aims to examine whether and how the experience of specialized external governance mechanisms mandated by the Employee Retirement Income Security Act of 1974 – the actuary and auditor – affect pension plan funding.

This study uses data from annual pension plan regulatory reports (Form 5500), Form 10-K filings, Form DEF 14A filings (company proxy statements) and publicly available data sources. The hand-collected data include information related to the pension plan’s actuary and auditor and various pension plan data disclosed in the company’s financial statement footnotes.

The author finds that more experienced actuaries and auditors are associated with better funded pension plans, especially when the company has higher financial risk or lower board independence. Additional analyses indicate that companies with more experienced actuaries and pension plan auditors are more likely to make higher annual pension plan contributions and hold fewer Level 3 fair value assets.

The dearth of pension plan governance research generally focuses on whether and how internal governance mechanisms affect pension plan funding. To the best of the author’s knowledge, this is the first empirical study of the relationship between external pension plan governance mechanisms and pension plan funding.

We develop a model to estimate salary-based premiums for pension benefit guarantees by simultaneously considering a stochastic interest rate and three practical pension plan termination conditions. We show the relationship among premium rates, a plan’s funding level, sponsoring firm’s capital position, early lapse, and a participant’s years of service. We also show how the regulatory intervention policy interacts with a plan’s funding level and a sponsor’s capital position and how it affects the pension insurance cost.

The purpose of this paper is to theoretically examine the risk-taking decision of corporate defined benefits (DB) plans. The equity holders’ investment problem that is represented by the position of a vulnerable option is solved.

The simple traditional contingent claim approach is applied, which considers only the distributions of corporate cash flow, without the model expansions, such as market imperfections, needed to explain the firms’ behavior for DB plans in previous studies.

The authors find that the optimal solution to the equity holders’ DB investment problem is not an extreme corner solution such as 100 percent investment in equity funds as in the literature. Rather, the solution lies in the middle range, as is commonly observed in real-world economies.

The major value of this study is that it develops a clear mechanism for obtaining an internal solution for the equity holders’ DB investment problem and it provides the understanding that the base for corporate investment behavior for DB plans should incorporate the fact that in some cases the optimal solution is in the middle range. Therefore, the corporate risk-taking behavior of DB plans is harder to identify than the results of the empirical literature have predicted.