Pension Deficit

This metric is useful simply in determining whether or not a company Pension Scheme is in deficit.

Given that Pension Liabilities are more senior than other forms of debt and equity, a large Pension Deficit can prove problematic for equity investors. When there is a deficit, it must be paid off somehow and there are two options for a company to pay off its deficit. It must either earn superior returns on its plan assets to close the gap or it must contriubute from operating profits, at the expense of shareholders.

In practice, it is often the latter of the two options that proves to be the case and so investors are often wary of large Pension Deficits, especially when they are large relative to the sponsor company.