Lesson 9 of 11
A promise and a rate
Lockheed Martin owed $26,735 million of pension benefits at the end of 2025. Service cost was $50 million and interest cost was $1,472 million.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A defined benefit obligation is the present value of promises already made, so a discount rate sets its size.
- Funded status is plan assets less that obligation, and it is the figure that appears on the balance sheet.
- Most of the year's movement in a closed plan is interest unwinding, not benefits being earned, and much of the volatility is parked outside profit.
A defined benefit pension is a promise to pay a former employee a sum every year for the rest of their life. The accounts have to put a number on that today.
There is only one way to do it: forecast the payments and discount them. Both steps are estimates, and the discount rate is the one that moves the answer most.
Lockheed Martin's qualified pension obligation, three year ends
- 31 December 2023$28,959m
- 31 December 2024$27,199m
- 31 December 2025$26,735m
Funded status is the balance sheet figure
Lockheed Martin's fiscal 2025 10-K, filed on 29 January 2026, reports a benefit obligation for its qualified defined benefit pension plans of $26,735 million (Lockheed Martin Corporation FY2025 10-K, accession 0001628280-26-004195) at 31 December 2025, against $27,199 million a year earlier and $28,959 million at the end of 2023.
The net unfunded status of those plans was $3,885 million (Lockheed Martin Corporation FY2025 10-K, accession 0001628280-26-004195) at 31 December 2025 and $4,785 million a year earlier. That deficit, the shortfall of plan assets against the obligation, is what appears on the balance sheet. The gross obligation and the gross assets do not.
Where the year's movement came from
That ratio is the signature of a plan closed to new accrual. Almost nothing is being earned and almost everything is the passage of time on an old obligation. For a reader it means the pension is a financing item rather than an operating one, whatever line of the income statement the components appear on.
The rate that sets the size
The same filing discloses a weighted average discount rate for these plans of 5.375 percent (Lockheed Martin Corporation FY2025 10-K, accession 0001628280-26-004195) for 2025, against 5.625 percent for 2024 and 5.00 percent for 2023.
A quarter-point move in that rate changes the present value of a stream lasting decades by a meaningful share of the obligation. The rate is not chosen freely: it is meant to reflect yields on high-quality corporate bonds of matching maturity at the measurement date. But it is a market rate applied by the company to its own payment profile, and it moves every year.
The expected long-term rate of return on plan assets, disclosed at 6.50 percent for each of 2025, 2024 and 2023, is a separate assumption that feeds the components of cost.
Where the volatility is parked
Actuarial gains and losses, the differences between what was assumed and what happened, do not all hit profit in the year they arise. They are recognised in other comprehensive income and released into profit over time.
The consequence is that a pension can swing by billions between two balance sheets while the income statement shows something much smoother. A reader who wants the real movement has to read the obligation reconciliation and the comprehensive income statement, not the profit line.
Check yourself
What appears on the balance sheet for a defined benefit plan?
- The gross obligation
- The funded status: plan assets less the obligation
- The expected benefit payments for the next year
Show the answer
Answer: B.
Lockheed's qualified plans showed a net unfunded status of $3,885 million at the end of 2025. The gross obligation of $26,735 million and the plan assets behind it are in the note.Interest cost of $1,472 million against service cost of $50 million tells you what?
- The plan is growing quickly
- Almost nothing is being newly earned, so the obligation is mostly the unwinding of a discount on old promises
- The discount rate is too low
Show the answer
Answer: B.
That ratio is the signature of a plan closed to new accrual. The obligation behaves like a financing liability rather than an operating cost.Why can a pension obligation move by billions without profit moving much?
- Pensions are excluded from the accounts
- Actuarial gains and losses go through other comprehensive income and are released into profit over time
- The obligation is only measured every few years
Show the answer
Answer: B.
The measurement is annual and the balance sheet reflects it. The smoothing sits between the balance sheet and the income statement, which is why the two tell different stories.Sources
- Lockheed Martin Corporation, FY2025 Form 10-K, filed 29 January 2026, accession 0001628280-26-004195, retirement benefits note, for the benefit obligation at 31 December 2025, 2024 and 2023, the reconciliation of the obligation for 2025, the net unfunded status at 31 December 2025 and 2024, the weighted average discount rate for 2025, 2024 and 2023, and the expected long-term rate of return on plan assets.
- ASC 715, Compensation, Retirement Benefits, on measuring the benefit obligation, recognising funded status on the balance sheet, and the treatment of actuarial gains and losses.
What this leaves out
- Every figure here is history, read from the filing named. Nothing is a statement about Lockheed Martin today and nothing is a view on any security.
- The figures are for the qualified defined benefit pension plans only. Retiree medical and life insurance plans are disclosed separately in the same note and are not included here.
- The claim that a quarter-point rate move matters is directional. The exact sensitivity depends on the duration of each plan's payment profile, which this lesson does not compute.
- Whether a pension deficit belongs inside a debt figure is a construction choice on which sources legitimately differ.