How do you treat pension obligations in the EV-to-equity bridge?

Answer

Mechanics

Pensions are a standard debt-like item in the EV-to-equity bridge.

IB convention

```
Tax-effected pension adjustment = (DBO - plan assets) x (1 - tax rate)
Equity value = EV - net debt - tax-effected pension adjustment - other debt-like items
```

Tax-adjustment logic

Pension provisions are typically tax-deductible when paid in cash. The tax shield reduces the economic burden, so the net pension liability is scaled by (1 - tax rate).

Deep diveShow more details

Example — ChemicalCo

Inputs:

DBO: $200m
Plan assets: $120m
Tax rate: 30%
Standalone EV: $800m
Net bank debt: $100m

Calculation:
```
Net pension underfunding: $200 - $120 = $80m
Tax-effected underfunding: $80 x (1 - 30%) = $56m
Equity value: $800 - $100 - $56 = $644m
```

Complications

Cash payout profile: If pension obligations run off over 30+ years, the cash burden is long-dated.
Multi-employer plans: Hard to separate in carve-outs.
Withdrawal liability: Plan termination can trigger immediate funding obligations.

Pitch tip

Use tax-effected net underfunding as the valuation adjustment. For industrial middle-market companies it may be $30-70m; for large industrials it can be billions. An equity bridge without this adjustment is systematically too high.

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