Why does interest cost increase even when no new employees accrue benefits?

Interest cost reflects the passage of time reducing the discount between present value of future obligations and their nominal amount. Even a frozen plan with no benefit accrual has positive interest cost as the benefits get one year closer to payment. It is not a cash outflow but an accounting measure.

Does interest cost offset expected return on plan assets in pension expense?

Under GAAP, interest cost on PBO is partially offset by expected return on plan assets in the pension expense line. Net pension expense = service cost + interest cost - expected return +/- amortization. A well-funded plan with large asset base may have negative net pension expense if expected return exceeds interest cost.

Pension Interest Cost on Obligation

Calculate pension interest cost as the product of beginning PBO and the discount rate, representing the time value cost of unwinding one year of discounting on the existing pension liability.

Principal ($)

Annual Rate (%)

Years

Compounding / Year

$ Finance Disclaimer: These calculators are for educational and illustrative purposes only. Results do not constitute financial advice. Consult a licensed financial advisor before making investment or borrowing decisions.

How to Use

Enter the values for the scenario you are assessing. Calculate pension interest cost as the product of beginning PBO and the discount rate, representing the time value cost of unwinding one year of discounting on the existing pension liability. Use the pension interest cost result to inform your calculation.

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