A longitudinal study of SFAS 87 pension rate assumptions

Amid allegations of widespread abuse in the business press, an investigation is presented of the reliability of three rate estimates required under SFAS 87 - the discount rate, expected rate of return on plan assets, and expected rate of future compensation - over the seven-year period 1987-1993. Although average discount rates have decreased substantially in recent years, discount rate declines have lagged behind declining yields of high-quality corporate bonds, PBGC rates, or 30-year (benchmark) government bonds. The SEC, therefore, found it necessary to set a guideline of 7% for 1993 and firms responded with an average rate of 7.43%. Expected rates of return are changed infrequently - consistent with the SFAS 87 requirement that they reflect long-run investment expectations. Although expected rates of return exceed discount rates in every year, they tend to match actual rates of return over time. Lastly, no support was found for press allegations of a relationship between employer pension contributions and SFAS 87 rate choices.