Pension Accounting and Disclosure Reforms: Determinants and Consequences

Accounting standard-setting bodies and regulators have imposed requirements to improve pension accounting regulations and disclosure practices due to the importance and materiality of defined benefit pension plans. In particular, IAS 19R was recently amended to address the excessive risk-taking in pension plan investments. In addition, academics, and practitioners have stressed the importance of high-quality and transparent disclosure to improve the usefulness of information aimed at stakeholders. Drawing on theories such as agency theory, positive accounting theory, stakeholder salience theory, collective bargaining theory, signalling theory, and behavioural decision theory, the study addresses three key research questions along two axes: the implications of accounting regulations on pension investment decisions followed respectively by the determinants and consequences of pension disclosure practices. Therefore, this study first examines the economic consequences of IAS 19R on pension asset allocations and the moderating role of firm financial distress by relying on a sample of European listed firms affected by IAS 19R, compared to a control group of US firms that share similar firms’ characteristics but are unaffected by the standard between 2009 and 2014. Second, by relying on an automated content analysis approach to evaluate the specificity of defined benefit pension plan information for 119 FTSE350 listed firms over the period 2017 to 2019, the study examines whether a firm’s unionisation level has an impact on the quality (specificity) of pension information in the strategic report and whether this relationship is moderated by the level of cash holdings. Thirdly, the study considers whether the pension information specificity affects credit rating agencies' (CRAs) decisions. It also examines whether and how pension information specificity influences credit rating disagreement between CRAs. Respectively, the analysis reveals firms shifted out of equities during the post-IAS 19R period, especially if they were in financial distress. Some firms allocated pension plans to other asset classes, but the types of asset classes being re-allocated varied across countries, suggesting that the economic consequences of IAS 19R on pension asset allocations are influenced by firms’ financial health and the country’s pension welfare system. Subsequently, the study found that while the strategic report became lengthier, there was a decline in the quality (specificity) of pension information. However, a higher unionisation rate improved the quality of pension disclosure, suggesting that trade unions are seen as salient stakeholders who can influence firms' disclosure strategies; especially if firms hold high cash levels that enhance employees-employers trust. Finally, there is a significantly negative association between the level of pension information specificity in the firm's strategic report and credit rating decisions, suggesting that higher pension information specificity is associated with a lower credit rating or downgrading. There is also evidence that greater pension information specificity reduces rating disagreement, particularly when the ratings are two notches or higher. Overall, standard-setting bodies and practitioners should consider the role of the dimension of social welfare characteristics in the allocation of pension plans to different asset classes, which may result in shifting rather than mitigating pension risk within the pension plan. Furthermore, regulators should pay attention to firms' disclosure strategies when they face salient stakeholders to accommodate their demands which may cause inconsistency in reporting behaviour resulting in a lack of information transparency to all stakeholders.