15
4/14/2003
Pension Accounting in 1-1/2 Lessons
•Net pension gains
(pension income after pension-related expenses) are funds held in a trust for retirees and future
retirees. These gains are not corporate funds. Therefore, net pension gains should
not be included in Standard
& Poor’s Core Earnings.
•Pension
expenses include service costs and interest costs:
–Service costs are
deferred compensation, representing the benefits that accrue from the current year’s labor services.
–Interest costs are
financing costs, reflecting the passage of time as the moment when benefits will be paid draws closer.
These costs should be covered by the pension fund.
Specifically, the actual
return on pension plan assets should cover interest costs.