IAS 19 and the market valuation of UK DB pensions

This paper investigates how defined benefit pensions deficits/surpluses influence UK company valuation under the fair value accounting regime that became mandatory in 2006 with the introduction of IAS 19. Using a sample of FTSE firms from 2006 to 2012 we find that reported pension deficits significantly reduce the market value of a company, with the market valuation of deficits being larger than that reported by firms under IAS 19. We present evidence that this is due to the market discounting pension liabilities at a ’risk-free’ rate (government bond) rather than the AA corporate bond yield allowed for under IAS 19. ∗I am particularly indebted to my Ph.D. supervisor Francis Breedon for his guidance. I thank Pete Richardson, John and Preston Llewellyn, David Collinson, Jeremy Apfel and Ian Tonks for many insightful comments. Thanks also to seminar participants at Queen Mary, the Institute of Actuaries and the Pension Insurance Corporation. Support from the Pension Insurance Corporation is gratefully acknowledged.