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Do you take into account pension assets/liabilities in your valuation?


Cigarbutt
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I look more and more at this component when assessing investment opportunities, esp. in the large cap category.

Typically this comes as one of the adjustments after the main analysis.

This is potentially a big issue going forward.

Some talk about a crisis but the most likely scenarios imply "adjustments".

When you look at the financial statements footnotes, one at least has to appreciate that optimistic assumptions are usually the norm now. When you play with these assumptions, because of the long term nature of the largely off-balance sheet obligations, the financial impact can be very real. For some large corporations, the pension assets are comparable to the firm's equity. Even reasonable adjustments to assumptions can offset 1 or 2 years of earnings for the firm. Perhaps not the end of the world, but if you use some kind of cash flow discount model or even an adjusted type of P/E measure, some kind of adjustment has to be made.

 

For those interested in this issue, two links:

 

1-    http://www.apapr.ro/images/BIBLIOTECA/reformageneralitati/2016%20citi.pdf

 

Sorry, long document by Citi but well researched and balanced.

 

2-    http://www.mauldineconomics.com/frontlinethoughts/angst-in-america-part-5-the-crisis-we-cant-muddle-through

 

Mr Mauldin is a story teller and often attracts attention with a doom and gloom type of approach and the text focuses on public pensions but I find he stresses important principles that may need to be applied to both the public and private sectors.

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In theory a pension shortfall is the same as any other liability, & should be part of the valuation. Dependent where the plan sponsor is located - the liability may also rank higher on the liquidation scale, materially affecting the coverage of senior debt holders. But theory is not reality ......

 

The more retirees relying on that sponsors pension, the more sponsors in similar deficit positions, and the more economies with the same issue (most of western europe) - the greater the certainty there will be a 'bail out'. And especially, since the global precedent of the 'crisis' bailout.

 

'Grey Power' keeps you elected, they are also your grandparents (if you're one of those policy makers), and the establishment has to keep them sweet - or risk having the radicals running the place (France).

 

Usually the more hostages you have, the stronger your negotiating 'power'.

But when the hostages have teeth, & the willingness to use them, you quickly discover that you're the guy wearing the milk bone undies. Pensioners have nothing to lose, & many have also survived various wars; threats just p*** them off - & make them fight harder.

 

Most folks take a predatory approach.

Bring it on.

 

Analysts will include the pension deficit, creating liquidation valuations. Let the Wall Street machine trash both the company, & the industry - quietly buy in the stock dirt cheap, & wait for the bailout.

 

Do you really think that GM, Chrysler, & Ford will be liquidated, & millions of people fired (including all the supplier employees), just because the pension plans are in deficit?  Or is it far more likely that all those jobs are kept, plan assets are transferred to the government, & the government takes over the pension liability?

 

SD

 

 

 

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