A Normative Approach to Pension Fund Management

Frankfurter, George M.; Hill, Joanne M.

doi:10.2307/2330373

Cited by 14 publications

(1 citation statement)

References 13 publications

(10 reference statements)

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“…Therefore, firms in these jurisdictions wanting to minimize their cash flows and / or to defer them as long as possible could well adopt a strategy such as this, where special payments for actuarial losses are only made where the plan is in a deficit position and the payments are spread over the maximum allowable period. Such an approach was advocated by Frankfurter, Hill, and Keenan (1981). There is also empirical support to suggest that minimizing pension fund payments to underfund pension plans and avoid pension surpluses is common in Canada (Bonnar, 2007;Lanoie and Arvin, 1994).…”

Section: Methodsmentioning

confidence: 99%

Smoothing Mechanisms in Defined Benefit Pension Accounting Standards: A Simulation Study*

Morrill

Shand³

2009

Accounting Perspectives

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The accounting for defined benefit (DB) pension plans is complex and varies significantly across jurisdictions despite recent international convergence efforts. Pension costs are significant, and many worry that unfavorable accounting treatment could lead companies to terminate DB plans, a result that would have important social implications. A key difference in accounting standards relates to whether and how the effects of fluctuations in market and demographic variables on reported pension cost are “smoothed". Critics argue that smoothing mechanisms lead to incomprehensible accounting information and induce managers to make dysfunctional decisions. Furthermore, the effectiveness of these mechanisms may vary. We use simulated data to test the volatility, representational faithfulness, and predictive ability of pension accounting numbers under Canadian, British, and international standards (IFRS). We find that smoothed pension expense is less volatile, more predictive of future expense, and more closely associated with contemporaneous funding than is “unsmoothed” pension expense. The corridor method and market‐related value approaches allowed under Canadian GAAP have virtually no smoothing effect incremental to the amortization of actuarial gains and losses. The pension accrual or deferred asset is highly correlated with the pension plan deficit/surplus. Our findings complement existing, primarily archival, pension accounting research and could provide guidance to standard‐setters.

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Section: Methodsmentioning

confidence: 99%