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Discounting and the market valuation of defined benefit pensions

Author

Listed:
  • Luca Larcher

    (Queen Mary University of London)

  • Francis Breedon

    (Queen Mary University of London)

Abstract
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 signficant, as credit risk free discounting would decrease the reported value of FTSE 100 firms by about 7%.

Suggested Citation

  • Luca Larcher & Francis Breedon, 2020. "Discounting and the market valuation of defined benefit pensions," Working Papers 932, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:932
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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2021/wp932.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Defined benefit pensions; IAS 19; Valuation; UK companies;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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