We penalise companies which have a high level of pension obligations relative to equity. As Figure 97 and Figure 98 show, large under-funded pension obligations are primarily a developed world problem, with the US, UK and Germany facing the largest deficits relative to sales and equity. Of course, the amount of pension obligations highlighted in an annual report will depend on a number of assumptions, including discount rates. Investors should scrutinise annual reports to see if assumptions are reasonable.
Our accounting screen is set to trigger a red flag when pension liabilities to equity exceeds the 80th percentile relative to its GICS industry peers, and/or when there is an abnormally large increase relative to the normal rate of change amongst industry peers over one and three years. This latter red flag is triggered when the increase in pension liabilities to equity exceeds the 80th percentile relative to the change experienced by GICS industry peers between 2010 and 2015.