Module I· Pensions AccountingBasic
Question
What is a defined benefit obligation (DBO), and how is it different from defined contribution?
Answer
| Defined benefit (DB) | Defined contribution (DC) | |
|---|---|---|
| Obligation | Fixed retirement benefit | Fixed contributions |
| Risk | Employer | Employee |
| Balance sheet | Pension liability / provision | None |
Market practice
- Middle-market companies: often still have DB plans, direct pension promises, pension funds, or support funds.
- Public companies: often hybrid: DB for legacy employees, DC for new hires.
Important
Targets with DB plans can carry significant pension liabilities, often 10-25% of total assets for industrial middle-market companies.
Pitch tip
Treat pension underfunding as a net debt adjustment. For DB-heavy industrials, pension underfunding can be $50-500m and should be included as a debt-like item in the EV-to-equity bridge.