Pension underfunding and the expected return on pension assets: the impact of the 2008 financial crisis

Michaelides, Alexander, Milidonis, Andreas and Papakyriakou, Panayiotis (2025) Pension underfunding and the expected return on pension assets: the impact of the 2008 financial crisis. Journal of Risk and Insurance, 92 (3), 627-664. (doi:10.1111/jori.70003).

Record type: Article

Abstract

We use the 2008 crisis as an exogenous shock to the pension funding status of U.S. corporate defined benefit (DB) pension plans to examine its impact on the assumption of the expected return on pension assets (ER). Contrary to prior literature, we find that DB pension plans transitioning from funded to underfunded status make expense-reducing assumptions by increasing their ER. We also document that the ER manipulation is larger for plans whose funding after 2008 drops significantly. The funding deterioration conservatively generates a 28-79 basis points increase in ER, reducing the pension accounting expense by about 5.23% to 14.76% ($3.49 to $9.85 million). Our results are robust to controlling for the shock induced by the global financial crisis on corporate performance and other potential channels affecting ER.

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