In a recent year’s financial statements, Procter & Gamble showed an unfunded pension liability of $4,267 million and a periodic pension cost of $538 million

In a recent year’s financial statements, Procter & Gamble showed an unfunded pension liability of $4,267 million and a periodic pension cost of $538 million.

Explain the meaning of the $4,267 million unfunded pension liability and the $538 million periodic pension cost.


Answer:
The $4,267 million unfunded pension liability is the approximate amount of the pension obligation that exceeds the value of the net assets of the pension plan. Apparently, Procter & Gamble has underfunded its plan relative to the obligation that has accrued over time. This can occur when the company contributes less to the plan than the annual pension cost.

The obligation grows yearly by the amount of the periodic pension cost. Thus, the $538 million periodic pension cost is a measure of the amount of pension earned by employees during the year. The annual pension cost is determined by making assumptions about employee life expectancies, employee turnover, expected compensation levels, and interest.