Module II· DCF — Mechanics & FCFIntermediate
Question
How do you treat pension provisions in a DCF valuation?
Answer
Mechanics
Pension provisions are debt-like and are deducted from EV to reach equity value. The calculation runs in two steps:
- Net pension obligation (unfunded): defined benefit obligation (DBO) less plan assets.
- Tax adjustment: net value × (1 − t), because the tax shield applies on unwind — the after-tax item is deducted from EV.
Often significant at middle-market companies, because direct pension promises are frequently run without external funding (no plan assets).
Deep diveShow more details
Pitch tip
At many industrials and family-controlled companies, historically large pension liabilities are common — they can pull the equity value down by 10–20%. In an interview: 'I would deduct DBO net of plan assets as a debt-like item from EV, after-tax.'