1. The Association between Firms’ Pension Accounting Choices and Pension Liability Curtailment Decision Authors: Paul Klumpes, Yong Li, and Mark Whittington Discussant: Youngkyun (Young) Park August 7, 2007

2. 2 Comments Timely research FASB in the 2 nd phase may adopt a marked-to- market approach, instead of maintaining ‘smoothing’  lead to significant volatility in corporate earnings from non-operating activities,  cause some firms to consider significant changes in plan design (e.g., closing or freezing DB plans) and pension asset mix to reduce volatility (e.g., increasing allocation to fixed-income investments).  A recent Employee Benefit Research Institute/Mercer survey shows DB sponsors’ concerns about FASB's Phase II accounting changes (VanDerhei, 2007).

3. 3 Purpose of the paper Pension accounting policy choices (1997-99) ERR assumptions: voluntary updating vs. using ‘sticky’ Pension curtailments (2000-02) Closing DB plans to new hires or freezing DB plans for all member Inter- relationship Risk Management Hypothesis Firms voluntarily updating their ERR assumptions exhibit less propensity to curtail their DB plans than firms using ‘sticky’ assumptions.

4. 4 Main findings Firms adopting marked-to-market ERR assumptions are less likely to curtail their pension liabilities than firms using ‘sticky (only updating in every third year)’ ERR assumptions. Through univariate analysis, curtailers exhibit significantly lower funding ratios, higher rates of undertaking new investments, and higher pension expenses than maintainers.

5. 5 Suggestions Tables 3 and 4 (curtailers vs. maintainers) The following variables may be considered: 1)Plan size (in terms of # of participants) Small plans were more likely to be hard-frozen than larger plans, according to a report of the PBGC (2005) on PBGC-insured single- employer plans that had a hard freeze in place in 2003.  Hard freeze: No participant accrues any new benefits under the plan.

6. 6 Suggestions (cont’d) Tables 3 and 4 (curtailers vs. maintainers) 2)Single vs. multiple DB plans (PBGC, 2005) Companies sponsoring multiple plans were more likely to have hard-frozen at least one of their plans than were companies that sponsor only one plan. 3)Unionization A firm’s decision to close or freeze its DB plans may be affected by the existence of a union. Pension Benefit Guaranty Corporation, “An Analysis of Frozen Defined Benefit Plans,” Washington, DC: Pension Benefit Guaranty Corporation, December 21, 2005.

7. 7 Suggestions (cont’d) Explanatory variables for switch firms Explanatory variables for curtailers in the SWITCH sample are measured at year-3 relative to year 0 (year of curtailment). Assumes no change in the explanatory variables (e.g., SFUND) for the three years. However, switch firms frequently update ERR assumptions. Therefore, curtailment decisions of the switch firms may be affected more directly by the values in “year-1” than “year-3”.

8. 8 Question Explanatory variables for maintainers in Table 4 Switch sample (1997-99) Curtailer vs. Maintainer (2000-02) Year-3 relative to year 0 (year of curtailment) Explanatory vars. measurement year Firm A (1997) Curtailer (2000) 1997Measured at 1997 Firm B (1997) Curtailer (2001) 1998Measured at 1998 Firm C (1998) MaintainerNo curtailmentNot clear (2002 ?) At what year are the explanatory variables for maintainers measured?