Journal of Business Finance & Accounting, 36(7) & (8), 899–924, September/October 2009, 0306-686X doi: 10.1111/j.1468-5957.2009.02160.x Determinants of the Pension Curtailment Decisions of UK Firms Paul Klumpes, Mark Whittington and Yong Li ∗ Abstract: During the last ten years of regulatory change, many UK companies have curtailed their defined benefit pension scheme. We test three competing explanations of UK corporate pension curtailments: integration, separation and risk management. We predict and find an association between the use of managerial discretion over changes in UK firms’ expected rate of return on pension assets (ERR) assumptions, and subsequent decisions to curtail future defined benefit pension obligations. These findings are consistent with a risk management-based explanation, even after controlling for other factors identified by prior literature as significant in explaining pension benefit reductions. We also find that curtailments and the risk management of ERR assumptions are associated with subsequent corporate restructuring decisions. The findings support the view that pension curtailment decisions are driven by the failure to adapt to new economic and regulatory pressures and that they are ultimately determined by strategic corporate risk management considerations. Keywords: ERR assumptions, pension curtailment decision 1. INTRODUCTION The ongoing global trend for employers to terminate their underfunded defined benefit (DB) pension plans has frequently been explained by the costs of maintaining these schemes. Traditional explanations have either been motivated by the assumption that the pension curtailment decision is independent of the firm’s financial strategy or totally integrated with it (Moore and Pruitt, 1990; and Stone, 1987). Most of these explanations applied to US settings when pension surplus reversions were common and prior to the enactment of legislation prohibiting these practices. However, a combination of increasing longevity and poor investment returns have been highlighted by the media as causing large numbers of UK firms to curtail their ∗ The first author is from Imperial College Business School, London. The second author is from the University of Aberdeen Business School. The third author is from Stirling Management School, University of Stirling. Comments provided by participants at the 2003 British Accounting Association annual meeting, the FMG- UBS Pension Research Seminar at London School of Economics (2004), Tanaka Business School accounting workshop (2004), the 2004 American Accounting Association Annual Congress, and the 2007 American Risk and Insurance Association Meeting, are greatly appreciated. The authors also acknowledge the helpful advice of the journal editor and referees. (Paper received November 2007, revised version accepted April 2009, Online publication September 2009) Address for correspondence: Mark Whittington, University of Aberdeen Business School, Edward Wright Building, Aberdeen AB14 0TR, UK. e-mail: mark.whittington@abdn.ac.uk C  2009 The Authors Journal compilation C  2009 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 899