The Impact of UK Pension Accounting Rule Change on Pension Curtailment Decisions

38 Pages Posted: 30 Sep 2003

See all articles by Paul J. M. Klumpes

Paul J. M. Klumpes

Aalborg University Business School

Yong Li

King's College London

Mark Whittington

Warwick Business School

Date Written: February 18, 2007


Both international and US accounting pension rules are changing to a market value approach. This study develops competing hypotheses to explain whether the decisions by UK firms to curtail pension arrangements during the period of an extended adoption period of similar new pension accounting rules were interrelated with the managerial discretion over the timing of pension discount rate assumptions. We predict that UK firms exploited the extended adoption period of the new standard by switching their expected rate of return on pension assets assumptions (ERRs) in order to ameliorate the mismatching of assets and liabilities. Consistent with these predictions, we find that UK firms' pension curtailment decisions are associated with their discretion over reported ERRs, effectively a risk management technique. This finding holds even after controlling for alternative explanations for pension termination decisions, based on traditional integration and separation theories concerning the ownership of pension fund surpluses or deficits. The implications of these findings need to be considered by other accounting jurisdictions as they update their accounting standards.

Keywords: actuarial funding method, pension accounting

JEL Classification: M41, G32, J53

Suggested Citation

Klumpes, Paul J.M. and Li, Yong and Whittington, Mark, The Impact of UK Pension Accounting Rule Change on Pension Curtailment Decisions (February 18, 2007). Available at SSRN: or

Paul J.M. Klumpes (Contact Author)

Aalborg University Business School ( email )

Fredrik Bajers Vej 7E
Aalborg, DK-9220

Yong Li

King's College London ( email )

150 Stamford Street
London, SE1 9NN
United Kingdom

Mark Whittington

Warwick Business School ( email )

Accounting and Finance Group
Coventry CV4 7AL
United Kingdom
+44 1203 522138 (Phone)
+44 1203 523 779 (Fax)

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