Changes in the Funded Status of Retirement Plans after the Adoption of SFAS No. 158: Economic Improvement or Balance Sheet Management?

Abstract

Statement of Financial Accounting Standards No. 158 (SFAS 158) requires all companies to report the funded status of defined benefit pension plans and other postretirement plans, such as retiree healthcare plans, on the balance sheet for fiscal years ending after December 15, 2006. Prior to this, underfunded retirement plans were often not recorded as a liability on company‟s balance sheets. At the end of 2005, the average defined benefit pension plan of the companies in this study was underfunded by $324 million and the average other postretirement plan was underfunded by $760 million. After the adoption of SFAS 158 in 2006, this average underfunding decreased. After controlling for changes in market conditions, I find that companies with debt contracting incentives to manage their balance sheets had a larger increase in their defined benefit pension plan funded status subsequent to the adoption of SFAS 158. This increase was at least partially due to the choice of assumptions used to measure the pension obligation.