What is Net Periodic Pension Cost?

Net periodic pension cost is the cost of a pension plan for a reporting period, as stated in an employer’s financial statements. This cost includes the following components:

Actual return on plan assets. This is the difference between the fair values of beginning and ending plan assets, adjusted for contributions and benefit payments. The return on assets is derived from interest and dividends accumulating within the pension plan, as well as from changes in the fair value of the plan’s assets. It is a financial item, rather than a cost related to employee compensation.
Amortization of prior service cost or credit. When an employer issues a plan amendment, it may contain increases in benefits that are based on services rendered by employees in prior periods. If so, the cost of these additional benefits is amortized over the future periods in which those employees active on the amendment date are expected to receive benefits.
Gain or loss. This is the gain or loss resulting from a change in the value of a projected benefit obligation from changes in assumptions, or changes in the value of plan assets.
Interest cost. This is the interest on the projected benefit obligation. It accrues each year on the projected benefit obligation, which was originally recorded on a discounted basis. Interest cost is a financial item, rather than a cost related to employee compensation. The actuary assists in the selection of the interest rate to be used to discount the projected benefit obligation.
Service cost. This is the actuarial present value of benefits related to services rendered during the current reporting period. The cost includes an estimate of the future compensation levels of employees from which benefit payments will be derived.