Do pension plans strategically use regulatory freedom?

We use a historical experiment to test whether U.S. corporate defined benefit pension plans strategically use regulatory freedom to lower the reported value of pension liabilities, and hence required cash contributions. For some years, pension plans were required to estimate two liabilities – one with mandated discount rates and mortality assumptions, and another where these could be chosen freely. Using a sample of 11,963 plans, we find that the regulated liability exceeds the unregulated measure by 10 percent and the difference further increases for underfunded pension plans. Moreover, underfunded plans tend to assume lower life expectancy and substantially higher discount rates. The effect persists both in the cross-section of plans and over time and it serves to reduce cash contributions. Finally, we show that credit risk is unlikely to explain the finding. Instead, it seems that plans use regulatory leeway as a simple cash management tool.