I was talking with my coworker today about defined benefit pension plans. Most of these funds have a "funded status" which is netted and then shown on the balance sheet as an asset if it's overfunded and liability if it's underfunded (more likely the case). PBO is the present value of future liabilities and Plan Assets are your plan assets.

The question is whether or not to consider the full PBO (so all pension liabilities) as debt when calculating debt/cap or only the net underfunded status or none of it. I currently add back the lower of Plan Assets/PBO to the balance sheet to both assets and liabilities to adj. for pension (If you think this is incorrect tell me).

This will make companies such as F, DD, KFT, IBM, a lot airlines, industrials, and etc. look very different. Since most people might skim to the bottom, would you consider all of PBO or funded status or no part of pension as debt when calculating debt/cap?

My current view has PBO as debt and Plan Assets as something similar to Marketable Securities and calculates ratios such as EV, debt/cap, interest coverage accordingly.

Very interesting question. I think this would probably be the best approach since the PBO is essentially the present value of cash that is contractually obligated to be paid. Another big risk is (obviously) that pension plans probably won't really give the kind of returns that the CFO of the Company would want (and probably projects) them to.

i think most credit analysis considers the underfunded portion as debt. altho often company will never have to make it up in large lump sums (usually status just getscworse and worse and of course most companies with large defined benefit pension plan work forces are doing poorly)

you may want to google pbgc

surprised this issue isn't getting more media these days