Pension Service Cost

Companies provide employees with a pension plan as part of a larger array of employment benefits. The FASB Statement of Financial Accounting Standards No. 87 requires firms to measure and disclose pension obligations as well as the performance and financial condition of their plans at the end of each accounting period.

Also known as "normal" pension costs, service costs are the actuarially-determined present value of retirement benefits earned by plan participants in the current period, based on the company's existing pension benefit formula. Factors influencing this cost include increases or decreases to staffing levels (plan participants), forecasted versus actual retirements, as well as above-plan increases to compensation.

Service cost is typically the largest component of a company's pension expense each year. The overall level of funding will also depend on variables such as the return on the fund's assets, prior service costs, interest expense, changes to the plan's formula, and the plan's gains and losses.

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