In a look at the balance sheet, pension costs can be overlooked or misjudged. It can turn out to be a very major expense that can derail a company or make it non-competitive. While more companies are getting out of pension programs, one has to have their radar up when looking at a company with pensions.

A number of things can happen to move pension costs in the wrong direction and turn a company into a very large under-funded situation:

I am not a pension expert, but probably neither are most people. I suggest if you run into this situation, get a good understanding of what you are getting into.

I was asked a question about what role pensions should play in capital budgeting decisions that a company with pension plans has to face- the accounting (FAS 87) expense, the employer contribution or some other metrics? My gut reaction is to go with the cash flow impact (most likely the employer contribution). However, I have to defer to others in this area. I noticed on Amazon doing a Goggle search that there is a book devoted entirely just to this topic- "The Impact of FAS 87 on Investment Analysis and Portfolio Management."

So whether looking from the outside in or facing it internally, even though it is fuzzy and as much art as science, there is too much at stake. Know what you are getting into and make sure you are covered for the future cash flow impact.