Discounting pension liabilities: funding versus value*

Jeffrey Brown and George G. Pennacchi

Journal of Pension Economics and Finance, 2016, vol. 15, issue 3, 254-284

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.

Date: 2016
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Citations: View citations in EconPapers (6)

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Chapter: Discounting Pension Liabilities: Funding versus Value (2015)
Working Paper: Discounting Pension Liabilities: Funding versus Value (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jpenef:v:15:y:2016:i:03:p:254-284_00

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