Unfunded pension liabilities
Hello,
When you calculate EV from Equity Value, do you adjust unfunded pension liabilities for the taxes that they save you please ?
Thank you so much !!!
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No, you do not. The argument is as follows:
when you calculated the equity value, regardless of the method, it should have already contained the benefits that equity holders get from tax savings on pension obligations or, in general, on debt.
unfunded pension obligations are not different from debt: the company has to pay interest on the liability and eventually the liability itself.
employees in this light are simply another form of creditors to the firm.
Therefore we add pension obligations as is to the equity value, just like we do with debt (which has tax benefits as well).
EDIT: if the unwinding of the unfunded obligation is tax deductible, which turns out to be true in the US (but not necessarily in other parts of the world) it should be done on the after tax level. That is, when moving from Equity Value to EV add back the after tax unfunded pension liability. Hawkeye 79 is right as it concerns the US.
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