Pension accounting can produce some odd results, such as companies that report a pension surplus but which still make ‘deficit reduction’ cash contributions. This illustrates an underlying problem in financial reporting where pension assets and liabilities may not reflect the true economic position of the sponsoring company.
We think the increasing closure of defined benefit schemes to new accrual, and the growing trend to de-risk, including the use of pension buy-ins and buy-outs, makes the flaws in pension accounting increasingly obvious. We explain the problem and what amount you should include instead in an equity valuation.
Continue reading “A pension accounting asset may be an economic liability”