Discounting pension liabilities: Funding versus value

Research output: Contribution to journalArticle

Abstract

We argue that the appropriate discount rate for pension liabilities depends on the objective. In particular, if the objective is to measure pension under- or overfunding, a default-free discount rate should always be used, even if the liabilities are themselves not default-free. If, instead, the objective is to determine the market value of pension benefits, then it is appropriate that discount rates incorporate default risk. We also discuss the choice of a default-free discount rate. Finally, we show how cost-of-living adjustments that are common in public pensions can be accounted for and valued in this framework.

Original languageEnglish (US)
Pages (from-to)254-284
Number of pages31
JournalJournal of Pension Economics and Finance
Volume15
Issue number3
DOIs
StatePublished - Jul 1 2016

Keywords

  • Pension liabilities
  • cost of living adjustments
  • discount rate

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

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