Volume 24, No. 6: S&P 500 Defined Benefit Plans: State Of The Pension Promise, 2014


Defined benefit plans are the financial reporting embodiment of the lament, “It seemed like a good idea at the time.” Once, they were a way to mollify unions by giving concessions without giving raises – and it worked, because the related accounting and disclosure requirements were weak. Pension costs and obligations were opaque for decades.
Eventually, the accounting and disclosures improved. Management skill in tweaking assumptions about defined benefit plans also improved, and raised investor awareness of the ways that pension plans affected financial reporting. For a few years, investors often fretted over unrealistic long-term asset earnings assumptions. Nowadays, most investors only care about the amount of cash to be dedicated to plan funding: defined benefit plans are viewed by them (and many managers as well) as dead weight to be jettisoned. That became harder to do in 2014 as the S&P 500’s defined benefit plans veered towards their worst underfunded levels since the financial crisis. In this report, we examine the status of the S&P 500’s defined benefit pension plans, and the earnings distortions introduced by the GAAP pension standards.

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