Financial Actuarial Assumptions: Empirical Study of How Brazilian Companies Manage Their Defined Benefit Plans

Abstract

This study investigates the factors that Brazilian companies use to manage their defined benefit plans, specifically the determinants of the three financial actuarial assumptions: discount rate, expected return on assets and compensation growth rate. The focus of this research is the companies listed on the B3 – Brazilian Stock Exchange - that recognized and disclosed, from 2010 to 2017, post-employment benefit characterized as Defined Benefit (DB). The sample containing 296 firm/year was divided into two subgroups considering the firm’s political connections. The results suggest that politically connected companies are less effective in managing the solvency of funds or, according to Kido, Petacchi and Weber (2012) act intentionally to justify the company's financial stress. The year before the elections proved to be the most relevant period of discretion, while the specific year of the electoral election only influences the determination of the actuarial financial premises in politically connected companies and, just like in Naughton, Petacchi and Weber (2015) the manager acts to improve the solvency (reduce the deficit) of the pension fund in these periods. The hypothesis that politically connected companies have an incremental adjustment in actuarial assumptions in electoral years has shown results consistent with the theory suggesting that this group of companies manages the reduction of the actuarial deficit in election times more incisively