Moneyzine
Contents
/Investment Guides /Pension Expense

Pension Expense

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
September 20th, 2023
Advertiser Disclosure

Definition

The term pension expense refers to the costs associated with pension plans that are reported on the company's income statement. Expenses associated with defined contribution plans are equal to the contribution made by the company in the current period. The pension expense associated with defined benefits plans include service and interest cost, the return on the plan's assets, as well as the amortization of prior service costs and actuarial gains or losses.

Calculation

Net Pension Expense = Interest Cost + Service Cost - Expected Return on Plan Assets + Amortization of Prior Service Costs + or - Amortization of Actuarial Gains or Losses

Explanation

Companies will provide employees with a pension plan as part of a larger array of employment benefits. Pension plans are structured by companies to provide a periodic and reliable source of income when the employee reaches the plan's normal retirement age.

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. Pension expenses associated with defined contribution plans are simply equal to the contribution made by the company to the plan in the current accounting period.

The calculations involved in determining a company's obligation under a defined benefit plan are complex, and require the skill of an actuarial to perform. Generally, pension plan expenses would include:

  • Interest Costs (increases expense): The annual interest accrued on the beginning balance of the projected benefit obligation. Since the projected benefit obligation (PBO) is the present value of the retirement benefits earned by employees, the company incurs an annual expense equal to the discount rate used to determine the PBO multiplied by the starting balance of the PBO.

  • Service Costs (increases expense): The present value of the projected retirement benefits earned by the plan's participants in the current period.

  • Expected Return on Plan Assets (lowers expense): The dividends, interest, and capital gains generated by assets held in a company's pension plan.

  • Amortization of Prior Service Costs (increases expense): The systematic recognition of a pension expense in future periods resulting from a retroactive change to the plan's benefit formula.

  • Amortization of Actuarial Gains or Losses (increases or decreases expense): The increase or decrease to a company's estimate of their projected benefit obligation as a result of the periodic reevaluation of assumptions used when calculating the benefit.

Related Terms

pension plan, defined benefit plan, defined contribution plan, pension obligation, accumulated benefit obligation, vested benefit obligation, projected benefit obligation, service cost, pension interest cost, amortization of prior service cost, actuarial gains and losses

Explore Investing Further

Related Content

  • Biden Or Trump: Who Is Better For The Economy And Stocks?
    Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
    March 19th, 2024
  • When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
    March 14th, 2024
  • DRIP Brokers: Best Brokers for Dividend Investing for November 2024
    Reinvesting dividends could mean compound growth for your portfolio. But reinvesting them manually can be a hassle. This is why you could benefit from a dividend reinvestment plan (DRIP).
    March 12th, 2024
  • How To Invest in Real Estate Without Becoming a Landlord
    We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
    March 6th, 2024
  • Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
    ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
    February 29th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.