Pension accounting; a study of value relevance and the perception of decision usefulness in the UK.

Abstract

This study provides new evidence of the value relevance and the perception of decision usefulness of pension accounting information. The research contributes to the academic literature by using a mixed methodology approach (believed to be the first to do so in value relevance research) involving quantitative analysis of the relationship between the reported financial numbers and the market values of a sample of UK listed FTSE 100 companies over five accounting years from 2006 to 2010 and qualitative analysis in the form of semi-structured interviews with analysts and investors. The research focuses on pension accounting information which for the purposes of this study refers to the accounting for defined benefit (DB) pension schemes and other post-retirement benefits in accordance with the international accounting standard IAS 19. The research provides evidence that pension accounting information is value relevant and it is perceived to be decision useful. The research also provides evidence that pension accounting information is less value relevant than other accounting information and it is also perceived to be less decision useful than other accounting information. This is a pioneering study in terms of its use of a mixed methodology in value relevance while it is also one of the first pension accounting value relevance studies applied to UK listed companies and believed to be the first study of the perception of decision usefulness of pension accounting information. There is significant convergence in the quantitative and qualitative findings. The mixed methodology process of triangulation reveals very few cases of contradictions or differences between the outcomes of the quantitative and qualitative analysis. Caution needs to be exercised however, as results for pension components are not as robust as they are for core balance sheet or income statement items, specifically book value of capital per share and earnings per share. There is evidence that value relevance revealed by regression is significantly lower in times of equity market and economic turbulence. One of the most significant conclusions arising from the qualitative research and supported to a significant extent by the quantitative research is the importance to analysts and investors of specific pension cash flow information. It is believed that this PhD research is a basis for future research efforts that may help to identify areas that have possible future accounting policy implications.