The Elusive Relation Between Pension Discount Rates and Deficits

45 Pages Posted: 27 Jan 2020 Last revised: 8 Jul 2021

See all articles by Seth Armitage

Seth Armitage

University of Edinburgh - Accounting and Finance

Ronan Gallagher

University of Edinburgh - Edinburgh Business School

Jiaman Xu

University of Edinburgh - Accounting and Finance Group

Date Written: June 30, 2021

Abstract

The relation between defined-benefit pension discount rates and funding status is more complex than it might first appear. Existing evidence suffers from estimation biases which makes precise inference unreliable. We document the biases and quantify their impact on inference in relation to corporate window dressing of DB funding status. Our empirical evidence from the UK suggests that pension sponsors use discretion in choice of pension discount rate not only to reduce reported deficits, but also to reduce reported surpluses.

Keywords: Defined Benefit, Pension, Discount Rate, Manipulation, Accounting Standards, Window Dressing

JEL Classification: M49; M48; G39

Suggested Citation

Armitage, Seth and Gallagher, Ronan and Xu, Jiaman, The Elusive Relation Between Pension Discount Rates and Deficits (June 30, 2021). Available at SSRN: https://ssrn.com/abstract=3514448 or http://dx.doi.org/10.2139/ssrn.3514448

Seth Armitage (Contact Author)

University of Edinburgh - Accounting and Finance ( email )

29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom
44 131 650 3794 (Phone)

Ronan Gallagher

University of Edinburgh - Edinburgh Business School ( email )

29 Buccleuch Pl
Edinburgh, Scotland EH8 9JS
United Kingdom

Jiaman Xu

University of Edinburgh - Accounting and Finance Group ( email )

Business School
University if Edinburgh
Edinburgh, Scotland EH8 9JS
United Kingdom

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