Got a pension question for y’all –
For purposes of valuation - Underfunded pension plans = (unfunded obligation) * (1-t) - Unfunded OPEB = full amount of OPEB !?
Is that how valuation is done ? do you know the reason for full amount of OPEB vs. post-tax for pensions?
thanks
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Because companies can get a tax break from contributing to pensions. So if they put in x, they get a tax shield of xmarginal tax rate and this can be viewed as only putting in x(1-t), thus they're not on the hook for the full underfunding and you can use this notion to value their equity higher.
Not sure about OPEB - but if you assume that the company can get a tax benefit on the pensions, you can probably assume the same thing for OPEB. That's what I did the one time I worked with this in-depth.
Also, it's not a given that you tax-adjust. You could more conservatively just take the full amount of underfunding. There are different views on this - clarify with your team. Moody's, for example, does not tax- adjust the pension underfunding when looking at adjusted debt but they also don't include OPEB, while S&P includes OPEB and tax-adjusts everything.
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