Contrasting the Information Demands of Equity- and Debt-Holders: Evidence From Pension Liabilities

Discounting and the market valuation of defined benefit pensions

“…As in the paper discussed above, Anantharaman and Henderson (2020) nd that the best t in terms of equity valuation is given by the going concern measure of pension liabilities, using ERPA discounting, but for the plans with the shortest duration, in which case the settlement measure of pension liabilities (the ABO) gives the best t. In this work the authors drop the method for estimating duration that we discuss above, instead relying on the method proposed by Hann et al (2007b) to estimate the PBO using dierent discount rates. While appropriate for US data, this method assumes that the DB schemes are nal salary and that the benets are 45 As we noted above the buy-out market is still quite small but has grown signicantly in recent years.…”

“…A recent paper by Anantharaman and Henderson (2016) (henceforth AH) tackles the same issue as this paper with a similar methodology but using US data. Their results are somewhat dierent to ours since they nd that valuation by the US credit market appears to use the corporate bond yield as the discount rate for pension liabilities whilst the equity market pricing is consistent with return on assets discounting (using the expected return on plan assets -ERPA -as the discount rate, a rate that is used for some US funds such as public sector plans but is not used at all in the UK).…”

“…A recent working paper by Anantharaman and Henderson (2016) tackles similar issues in the US context. They nd that discounting at the expected return on pension assets provides the best t in explaining both equity values and credit ratings (for nancially healthy rms).…”

“…Their robustness is discussed in Section 8, which also includes a different empirical specification using Tobin's Q model and extends our results to a wider sample. Section 9 discusses the similarities and differences between this study and Anantharaman and Henderson (2021), a recent paper that analyzes the issue of discounting pension liabilities in the US context. Section 10 concludes.…”

“…As there is no consensus on the scale of either of these effects (and they work in opposite directions), the approach of previous papers has been to assume they cancel each other out. 22 A recent paper by Anantharaman and Henderson (2021) tackles similar issues in the US context, looking at how credit and equity investors value pension liabilities. They find that these two groups of investors value pension commitments differently and that their valuations depend upon the characteristics of the pension plan.…”