Discounting and the Market Valuation of Defined Benefit Pensions
By luca larcher & Francis Breedon
We investigate how defined benefit pension schemes of FTSE firms are valued by the equity market, focusing on how future liabilities are discounted (since UK data allows us to estimate the duration of pension liabilities fairly accurately). We find that equity market valuation is consistent with discounting without allowing for credit risk. This differs from the approach used in published accounts for which IAS 19 (and SFAS No. 158, its US equivalent) allows for discounting with a corporate bond yield. The difference is significant, as credit risk free discounting would decrease the reported value of FTSE 100 firms by about 7%.
Source @Papers SSRN
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