The Effect of Pension Accounting on Corporate Pension Asset Allocation: A Comparative Study of UK and US
Eli Amir, Yanling Guan and Dennis Oswald
We investigate whether FRS 17 in UK has had any impact on corporate pension asset
allocation. FRS 17 requires pension assets and liabilities to be valued by reference to the
market conditions and the total surplus/ deficit in the pension scheme to be recognized as an
asset or a liability on the balance sheet. Additionally, actuarial gains/losses arising during the
fiscal year are required to be recognized immediately. Therefore, FRS 17 has the potential of
introducing a large element of volatility into company balance sheets. FRS 17 significantly
differs from its predecessor (SSAP 24) and SFAS 87 in the US where actuarial gains/losses
are deferred and amortized to income over average remaining service lives of employees and
the surplus/deficit in the pension scheme is mostly kept off-balance-sheet.
We hypothesize that there exists a shift away from equities to bonds in pension asset
allocation by UK sponsoring companies after the introduction of FRS 17. We compare the
pension asset allocation of those FTSE 350 firms that sponsor defined benefit plans during
the transitional period of FRS 17 with that of US public companies covered by Pensions and
Investments. The results show that UK firms reduced their pension fund exposure to equities
and increased their allocation to bonds during the period 2001-2005, even though in the same
period US firms maintained a stable allocation to equities and exhibited a declining trend in
the allocation to bonds. We also find that firms that are more vulnerable to FRS 17 volatility
shift more pension assets from equities to bonds. Finally, the above findings apply to both
those UK firms that only disclosed in accordance with FRS 17 and those UK firms that fully
adopted FRS 17 during the transitional period. Our findings are particularly important in light
of recent revisions to pension accounting in the United States (SFAS 158) that are similar to
FRS 17.
Keywords: Defined Benefit Pension Plans, Pension Asset Allocation, Pension Surplus/deficit,
FRS 17, SFAS 87.