Volume 22, No. 7: S&P 500 Pension Plans: Reality-Checking Their 2012 Status

Call them the financial statements within the financial statements. There’s enough information within the pension footnotes to evaluate the health of the pension plans just as if they were a stand-alone company. Defined benefit pension plans are far from dead; firms might not start them these days, but their legacy plans live on. Those plans have ongoing effects on the sponsor firms’ income statement, sometimes in ways that would never be expected.

Pension cost is a pervasive figure for firms with defined benefit plans. It can show in the income statement, and it can be charged to balance sheet accounts like inventory or self-constructed plant assets – wherever labor might be present. Investors have no way of knowing for sure the degree to which pension costs affect any particular statement, but they can at least observe the economics of the plans from the pension footnotes. They can also adjust for some of the nuances pension accounting standards bring into the earnings statement.

The pension footnote information also gives investors a decent look at the health of the pension plans. In 2012, indicators showed some encouraging improvement in the health of pension plans and reporting. Nothing would improve them more – or faster – than a 100-basis point increase in long-term interest rates, however.