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

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.