Dishonored contracts: Accounting and the expropriation of employee pension wealth

Abstract

There has been growing public disquiet in the U.S. and in the U.K. about takeovers aimed at seizing the excess in employee pension plans. Some critics have argued that expropriation of the accounting income lodged in the takeover target's pension surplus has been a primary motivation for these takeovers. Specifically, two questions have been raised about such transactions: first, whether such terminations violate implicit agreements with employees, and thus usurp the latter's legitimate claim to the pension surplus. Second, whether management's betrayal of employee trust increases contracting and monitoring costs in the economy at large. Financial reporting appears to exacerbate these problems: GAAP, under FAS 36, overstated the pension excess by undervaluing pension liabilities; the latter being calculated on an accumulated benefit basis rather than a going concern (“economic”) basis. Reporting this amount underscores the amount that could be expropriated by reneging on implicit pension agreements via a takeover and termination. This study suggests that the prospect of capturing pension excesses motivated a significant number of takeovers between 1981 and 1985. FAS 87 changed pension disclosure requirements after 1986 and thus remedied some, but not all, of the technical deficiencies of FAS 36. This change affirms, rather than refutes, the primary thesis of this study, however: that accounting is a malleable and contested social practice that is best understood (theorized) as a product of struggle and conflict, not as a faithful representation that unproblematically reflects an underlying, “eternal” economic truth. The study shows that, insofar as pension terminations that abrogate implicit contracts are encouraged by the prospects of seizing the accounting income lodged in the pension surplus, questions should be raised about accounting's partisanship in such distributional disputes.