DEFINITION of ‘Current Service Benefit’
The amount of pension benefit accrued by an employee who actively worked during a given time period. The current service benefit, when added to the prior or earned service benefit, represents the total value of an individual’s pension at any given time.
BREAKING DOWN ‘Current Service Benefit’
One of the primary differences between a defined benefit, or pension, program and a defined contribution program is that the amount of benefits that a retiree receives from the former is dependent on formulas that make assumptions based on how long an employee works and how much the employee earned over the course of employment, while the benefits received in the latter depend on the amount of funds that an employee deposits, whether an employer matches any contributions, and the performance of the investment options.
The current value of pension benefits is equal to the discounted value of future expected benefit payments based on actuarial assumptions. The components of these assumptions include the value of past service benefits (which is the discounted value of benefits earned through the pension valuation date) and the value of current service benefits (which is earned by the employees during the current year). Employers and employees will face an unfunded pension liability if they do not contribute enough to cover the pension liability for past service.
The percentage of an employee’s earnings that are considered towards a future pension benefit often adjusts over the years. For example, if an employee works from 1990 to 2015 the current service benefit percentage may be different for the years 1995 to 2000 and 2000 to 2005.
Some pensions may provide a death benefit if an employee has worked a minimum number of years but dies before reaching the plan’s required retirement age. This benefit may be calculated as a multiple of the annual current service benefit that the employee had accrued by the time of his or her death.