Template:NAV and pension liabilities

Net asset value and “pension liabilities”

Pension funds will usually describe their net asset value calculations as excluding pension liabilities. This is a bit baffling at first, but from a broker’s perspective — especially in the context of a NAV trigger Additional Termination Event — we think it’s okay.

In an ordinary fund, the investor is a shareholder, languishing with all that lovely alpha in the sludge at the bottom of the capital structure. They are equity participants and the fund’s obligations to them are not even “liabilities” as such — a liability implies a debt, and equity-holders are owners, not creditors, and their ownership interest is defined to be the value of the assets after accounting for all liabilities (being those owed to counterparties, brokers and so on).

In a pension fund, one talks of the fund’s liabilities to pension-holders. Now those liabilities can only be satisfied out of that equity holding, and is either an equity interest itself, or it is a subordinated liability, ranking behind secured and unsecured creditors (like swap counterparties), or being limited in recourse to the net value of the fund’s assets after all its senior debt liabilities are satisfied, so you get to the same place.

In any case in the context of a NAV trigger, getting this definition wrong (and including pension liabilities) might mean you spend your life waiving technical, but actually unimportant, breaches of the NAV trigger.