Document 9JKpNnKJ4erGxabKEL9mDjqp7

Eaton Corporation Financial Review Che fair values of short-term investments, marketable equity in vestments and debt securities, short-term and long-term debt, and interest rate swaps and caps are principally based on quoted market prices. The fair value of foreign currency forward exchange contracts and options, which primarily mature in 1997, and foreign currency prin cipal and interest rate swaps are estimated based on quoted market prices of comparable contracts, adjusted through interpolation where necessary for maturity differences. The pension asset (liability), by funded status of the plan, at Decem ber 31 follows (in millions): 19961995 Overfunded Underfunded Over. funded Under funded Accumulated pension benefit obligation Vested Nonvested Pension Plans The Company has non-contributory defined benefit pension plans cov ering the majority of employees. Plans covering salaried and certain hourly employees provide benefits that are generally based on years of service and final average compensation. Benefits for other hourly em ployees are generally based on years of service. Company policy is to fund at least the minimum amount required by applicable regulations. In the event of a change in control of the Company, excess pension plan assets of North American operations may bededicated to funding of health and welfare benefits for employees and retirees. The components of pension expense for the years ended Decem ber 31 follow (in millions): 1996 1995 1994 Service cost--benefits earned during year Interest cost on projected benefit obligation 1 return on assets > vnortization and deferral Value of future salary projections Total projected pension benefit obligation Fair value of plan assets Plan assets in excess ol (less than) projected benefit obligation Unamortized Initial net (asset) obligation Net (gain) loss Prior service cost Adjustment to recognize minimum liability As a result of the merger of several underfunded pension plans Into overfunded pension plans, the vested accumulated pension benefit obligation for underfunded plans decreased by $116 million in 1996, with an offsetting increase in the overfunded plans. Actuarial assumptions used in the calculation of the pension asset (liability) are as follows: 1996 1995 1994 Discount rate Compensation growth rate Long-term rate of return on plan assets Plan assets are invested in equity and fixed income securities and other instruments. Underfunded plans are associated principally with operations outside the United States. Postretirement Benefit Plans Other Than Pensions Generally, United States employees become eligible for postretirement benefits other than pensions, primarily health care and life insurance, upon retirement. These benefits are payable for life, although the Com pany retains the right to modify or terminate the plans providing these benefits. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features, including deductibles and co-payments. Certain plans limit the annual amount of the Com pany's future contributions towards employees' postretirement health care benefits. Company policy is to pay claims as they are incurred since, unlike pensions, there is no effective method to obtain a tax deduction for prefunding of these benefits under existing United States income tax regulations.