Authors: Paul Klumpes, Yong Li, and Mark Whittington

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. Comments • Timely research • FASB in the 2nd 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. 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. 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. Suggestions • Tables 3 and 4 (curtailers vs. maintainers) The following variables may be considered: • 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. Suggestions (cont’d) • Tables 3 and 4 (curtailers vs. maintainers) • 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. • 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. 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. Question • Explanatory variables for maintainers in Table 4 At what year are the explanatory variables for maintainers measured?