Should gains on pension plan assets favorably impact the sponsoring business’s operating results?
Over the life of a defined benefit pension plan, the total ultimate cost (or expense) to the sponsoring business will be equal to the total contributions to the plan that the business is required to make. This is the same as any expense that a business incurs: In the long run, the total value of the net resources used is equal to the total expense recorded. In a defined benefit pension plan, each dollar that the pension plan administrator earns on the pension plan assets is one less dollar the business will have to contribute. Therefore, it is only appropriate that returns on pension plan assets serve to decrease net periodic pension cost. Although some critics might agree in principle with this position, they would argue that recognizing the reduction in pension cost should stop before the business actually shows a gain from its pension operations. Before accepting these arguments, one should consider what conditions must normally exist for a net pension benefit to exist. In order for
