Do Corporates Set Pension Discount Rates Strategically?
55 Pages Posted: 9 Jul 2020 Last revised: 8 Apr 2021
Date Written: June 15, 2020
Corporations reduce the magnitude of their pension contributions through their choice of pension liability discount rates, but do so asymmetrically: firms are slow to drop the rates when corporate bond rates drop, but raise them rapidly when rates rise. This effect varies across firms due to heterogeneity in firm investment productivity and financing constraints that constrain corporate investments, particularly in years of low interest rates which significantly inflate pension liabilities, imposing negative external shocks to corporate investments. Corporations' ability to set higher discount rates thus improves investments of underfunded firms.
Keywords: Pension discount rate, Low interest rate, Pension liabilities
JEL Classification: G11, G22
Suggested Citation: Suggested Citation