Discounting and the market valuation of defined benefit pensions

We investigate how deftned beneftt pension schemes of FTSE ftrms 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 ftnd 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 signiftcant, as credit risk free discounting would decrease the reported value of FTSE 100 ftrms by about 7%.