COMPONENTS OF NET PENSION COST (BENEFIT)

Service cost

Present value of retirement benefits earned by employees working during the current year.

Interest cost on the benefit obligation

Interest cost arising from deferred payment of previously earned retirement

benefits. (The benefit obligation consists of all earned and unpaid service cost.)

Amortization of net deferred gains and losses

Deferred recognition of actual earnings on the pension portfolio above or below the expected return and changes in the benefit obligation that arise from changes in the assumptions (including such items as the discount rate, employee turnover, and mortality) used to estimate it.

Amortization of prior service cost

Recognition over several periods of an increase or decrease in the benefit obligation that results from the employer deciding to increase or reduce the amount that it expects to pay retired employees for services already performed.

Amortization of the transition amount

Amortization of the difference (either positive or negative) between the benefit obligation and the fair value of the assets in the fund at the time the company adopted FAS No. 87 (sometime between January 1, 1985 and January 1, 1987).

Gain or loss recorded due to a settlement or curtailment

Current recognition of some or all previously deferred gains and losses and prior service costs. A settlement occurs when an employer takes an irrevocable action to relieve itself of primary responsibility for the benefit obligation.

A curtailment occurs when an employer significantly reduces the expected years of service of existing employees or eliminates the accrual of defined benefits for some or all of existing employees’ future service.

Expected return on plan assets

A deduction from the other components of pension cost that is a surrogate for the annual return on the fund’s assets. Defined as the product of an expected long-term rate of return and a market-related value of plan assets.

Expected return is used in lieu of actual return to minimize annual fluctuations in net pension cost (benefit) resulting from volatility in stock and bond prices.