Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. Print
December 13, 2004 12:00 AM

High pension returns claimed by firms in play

Phyllis Feinberg
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    It's an open secret that companies manipulate their earnings assumptions by using unrealistic pension fund return assumptions. But a new study now suggests that companies also do this in connection with mergers and acquisitions.

    According to the study, "Earnings Manipulation and Managerial Investment Decisions: Evidence from Sponsored Pension Plans," companies' long-term rate-of-return assumptions for their pension fund assets are almost 30 basis points higher during merger years than during other years.

    The study was sponsored by the National Bureau of Economic Research, Cambridge, Mass. The authors are Joshua Rauh, professor at the University of Chicago School of Business, and Daniel Bergstresser and Mihir A. Desai, both professors at Harvard Business School, Boston.

    In the past few years, companies' use of overly aggressive pension fund assumptions has been widely criticized. This study is likely to provide more ammunition for critics of high assumptions.

    "There has been a powerful tendency to raise rate-of-return assumptions because of the impact it would have on short-term earnings," said Robert Arnott, chairman of Research Affiliates LLC, Pasadena, Calif., and one of the most prominent and vocal critics of companies' use of overly aggressive pension fund assumptions.

    Small minority

    Although he said he hadn't seen the study, Mr. Arnott thought that the 30-basis-point average increase for firms during merger years "would suggest that a small minority of firms make that adjustment during merger years. If a handful of firms make a 150-basis-point change in their assumptions, it would average out to a 30-basis-point change for all firms."

    Mr. Rauh said in an interview that he thinks the idea of a 150-point hike is too high. "Not too many firms would do that," he said.

    But Mr. Rauh believes a 30-point hike average by individual firms during years when they are making acquisitions is more realistic, according to the calculations in the study.

    "If companies have something going on (such as an acquisition) that requires a strong equity price, they could do this," said one pension actuary who declined to be named.

    However, the actuary added: "I'm not aware of any companies that have wrongly increased the rate of return on their pension assets to prop up their stock price before an acquisition."

    The study also investigates the degree to which managers are opportunistic with the assumed rates of return on pension assets.

    One of the areas the researchers evaluated is the extent to which choices on assumed returns intersect with the firms' merger activities. Messrs. Bergstresser, Desai and Rauh created a measure of the sensitivity of a firm's overall profits to the assumed long-term rate of return on pension assets. They showed that this sensitivity measure is an important determinant of the levels of, and the changes in, assumed rates of return.

    Specifically, a firm whose pension assets are twice as large relative to its operating income as the median firm in the sample makes a long-term rate-of-return assumption that is, on average, approximately 10 basis points higher than the median. A firm in the 90th percentile of sensitivity, on average, has a long-term rate-of-return assumption that is 40 basis points higher than a firm in the 10th percentile. Such differences in return assumptions can have a significant impact on reported earnings for these firms.

    The researchers further show that firms make particularly high return assumptions in periods leading up to the acquisition of other firms. This relationship is especially strong for firms whose reported income is the most sensitive to pension assumptions.

    "The fact that the magnitude of the estimated effect is higher at firms with higher pension sensitivity implies that the earnings generated by opportunistic adjustments to the long-term rate-of-return assumption around acquisitions are greater than would be the case if the magnitude of the effect was the same across different levels of pension sensitivity," the study said.

    34 basis points

    "Comparing two firms in the same industry and the same year, one of which makes an acquisition and the other of which does not, the result says that the acquirer's expected long-term rate of return is 34 basis points larger," the study said.

    The rate-of-return assumptions "by firms that acquire other firms in a given year are clearly higher," said Mr. Rauh. "Firms with earnings that are more sensitive have assumptions that are even higher."

    However, Shlomo Benartzi, assistant professor of accounting at The Anderson School, University of California at Los Angeles, who has also written about companies earnings' manipulation using aggressive pension fund assumptions, said he doesn't think it is a big problem in the mergers and acquisitions area.

    "A company would have to predict its mergers and acquisitions decisions (before they actually make them) because when you increase rate-of-return assumptions, it doesn't affect earnings until the following quarter," said Mr. Benartzi.

    The real cause of the problem, according to another source, is the accounting rules that allow the manipulation to take place.

    Keith Ambachtsheer, president of KPA Associates Inc., a pension consulting firm in Toronto, said accounting rules allow firms to factor the rate-of-return assumptions on their pension assets into their company's reported earnings.

    "When a company is making an acquisition or if a company is being acquired and wants to make the (stock price) picture as positive as it can … there are accounting rules to help them make things look as positive as possible," he said.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Targeting millennials: Author, niece put his latest book to music
    Targeting millennials: Author, niece put his latest book to music
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing