Fair-value Pension Accounting, Corporate Risk Management and Pension Investment Policy

This paper investigates whether employer sponsors manage their pension risk exposure as an integral part of firm risk, or manage these two risk exposures separately over an extended period (2003-2010) in the UK, when transition from a disclosure to a recognition pension accounting regime has taken place. We test three competing explanations of corporate pension investment policy: coordinated risk management, contribution volatility, and separation hypotheses. We predict and find a negative association between the systematic pension risks and prior year’s firm risk and operating asset risk during the period of recognition under fair value pension accounting (IAS 19). These findings hold after controlling for other economic determinants identified by prior literature as relevant for pension investment policy. Our empirical evidence supports the view that fair-value pension accounting has real economic consequences, and pension investment policy is a dynamic process that is ultimately determined by strategic corporate risk management considerations.