Looking back at recent volatility, we wondered how the FRS17 discount rate would have varied, both gross and net. A chart shows “assumed inflation” (based upon the gilts approach), the AA corporate bond yield and the net rate (simple). It is hard to see how this can be described as a best estimate.

Given that UK gilts are now only classed as “AA”, we also wonder if corporate accounting pension measures should be switched from “AA” to “A”.

Using yields and returns on UK corporate bonds since 1998, we found the following. We are grateful to S&P for allowing us access to the iBoxx data. One would naturally expect yields and returns to fall with perceived increasing quality.

For yields, on average, “A” were 0.4% above “AA” and “AA” were 0.2% above “AA”. This was as expected.

For returns over periods of 15 years, on average, “A” were higher by 0.2% than “AA” and “AA” were higher by 1.8% than “AAA”. This was not expected.