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There should be a section in the 10-K that shows what the pension's assets are invested in. Usually there isn't much detail beyond something like "60% stocks, 30% bonds, 10% real estate/private equity," or something like that. Usually the pension section is a large, several page additional Note in the 10-K for an old guard company like Lockheed Martin. Looking at the 10-K, LMT's pension note is Note 10, starting on page 74.

Also in the 10-K, the company will show the discount rate its using to discount those future pension liabilities back to the present. I always like to check that and see if the company has been raising or lowering it over time, and how it compares to other companies. All other things being equal, if a company raise the discount rate, the pension liability will be reduced.

The company also reveals the rate of return it expects to get on its pension assets. This is many times optimistic. I've seen long term expected rates of return of 9% when the pension fund is 40% or more invested in bonds at today's generally sky high bond prices. That 9% return is probably not realistic.

This is where it gets interesting. The fair value of the assets is usually pretty straightforward and gets marked to market every quarter (though the company only reveals those assets to investors once a year in the 10-K). The fair value of the assets goes up and down as the market goes up and down. In the last few years you've seen pension assets rise as those assets have ridden the rising prices in stocks and bonds. This reduces net unfunded pension balances. Trouble is, this can easily reverse when prices come down. As well, the projected pension obligation is based on judgement of returns on pensions assets, future pay raises, and at what rate to discount those balances back. A bigger or smaller projected pension obligation can be made by just tweaking one of those numbers a tiny little bit.

As long as I'm okay with the discount rate and rate of return, I'll take the unfunded portion and just add that to the company's debt, subtracting all that as a liability to get to the firm's equity value. If I think the company is being too optimistic and is using aggressive rates of return of discount rate, I'll either boost the unfunded pension liability or just pass on the company and put it in the "bad management" pile.

This investopoedia article does a nice job describing the basic mechanics of pension accounting:

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