Chapter 7 pointed out the companies with defined benefit pension plans are running two businesses, their core business and a pension fund. Just as the core business can add or lose value, so can the pension fund. The chapter emphasized that reformulated financial statements must clearly separate the two businesses, otherwise the source of the value generation is not clear.
At the end of 2023, Eastman Kodak Corporstion (KODK) reported pension liabilities of $2,974 million against the value of pension plan assets of $4,074 million (at fair value). That’s $1,110 million in overfunding. The value of the pension assets had increased significantly with a strong performance from its stock portfolio. That is value added for Kodak for it is backing for the pension liability. Shareholders will not have to make cash contributions to the pension fund as the pension liability grows.
But can shareholders realize the funding surplus? It’s for employees, not shareholders. Well, there are ways around it provided employees are not damaged. Kodak converted some pension obligations to employees by giving them a value-equivalent annuity that pays out on retirement. With the liability removed, the firm was then free to cash out the part of the pension fund no longer needed to cover the liability. The firm was expected to book a gain of $535 million with the maneuver. That compares with the $75 million from the firm’s core operations in 2023. Unlocking value, it is called.