Pension Plan Accounting Estimates and the Freezing of Defined Benefit Pension Plans

This study examines the determinants of employers' decisions to "hard freeze their defined benefit pension plans (i.e., eliminate all future pension accruals) and the corresponding pension accounting assumptions used at the time of the freeze. We find evidence that employers' decisions to freeze their plans are driven by the increased economic burden of their defined benefit plans-e.g., freezes are preceded by periods of falling market interest rates-and are constrained by employee resistance to the freezing of their plans. We also provide evidence that employers' opportunistically select pension accounting assumptions to exaggerate the apparent economic burden of their defined benefit pension plans at the time they freeze their plans. Specifically, we find that employers assume lower expected rates of return, which increases reported pension expense, and lower discount rates, which increases both the reported pension expense and the reported pension liability.