Table of Contents

Actuarial Valuation: A Pension Fund Appraisal

By

澳洲幸运5官方开奖结果体彩网:Will Kenton

Updated August 05, 2024

Reviewed by

Marguerita Cheng

Fact checked by Kirsten Rohrs Schmitt

Definition

An actuarial valuation is a statistical and demographic assessment of a pension fund's assets and liabilities to determine its funded status.

What Is an Actuarial Valuation?

An actuarial valuation is a type of appraisal of a pension fund's assets versus liabilities, using 澳洲幸运5官方开奖结果体彩网:investment, economic, and demographic assumptions for the model to determine the funded status of a pension plan. The assumptions are based on a mix of statistical studies and experienced judgment. Since assumptions are often derived from long-term data, unusual short-term conditions or unanticipated trends can occasionally cause deviations from f✨orecasts.

Key Takeaways

Actuarial valuations are used to assess the funded status of a defined-benefit pension fund.
Unlike market values, actuarial values rely on statistical inference and assumptions that are plugged into a model.
Actuarial models rely on long-term projections that include interest rates, demographic changes, and inflation.

Understanding an Actuarial Valuation

Many variables go into an actuarial valuation model. On the asset side, the actuary must make an assumption about employer contribution rates and the investment growth rate for the portfolio of stocks and bonds (澳洲幸运5官方开奖结果体彩网:Level 1- and 2-type assets) and other assets (illiquid Level 3-type). The calculation of p🦋ayment liabilities is much more complex.

The actuary must make assumptions regarding, but not limited to, the discount rate, employee contribution rates, wage growth rates, 澳洲幸运5官方开奖结果体彩网:inflation rates, mortality rates, service retirement ages, disabled retirement ages and interest on member accounts. If all the long-term assumptions are reasonable, then a realistic funding (or funded) ratio can be derived. The funding ratio equals assets over liabilities, with a ratio of over 1.00, or 100%, indicating that pension assets are sufficient to cover 澳洲幸运5官方开奖结果体彩网:liabilities.

Implications of an Actuarial Valuation

Fast Fact

Actuarial valuations are conducted in both the pr𒁃ivate and public sectors.

U.S. Steel disclosed in its 2019 annual filing that its funding ration as of Dec. 31, 2019, was 0.93, or 93% (plan assets of $5.4 billion divided by obligations of $5.8 billion). The company did not have enough plan assets to meet those obligations. However, as of December 2021, the funding ratio had improved to 1.04. Plan assets of $5.6 billion were enough to cover plan obligations of $5.4 billion.

Some states are in tough shape due to higher liabilities for worker pay (past negotiations with state employees resulted in greater pension payment guarantees). A 2019 study by the The Pew Charitable Trusts shows that the 20 lowest-funded pension states have just 56% of their pensions funded as of 2017. Overall, U.S. states have funded 69% of their obligations, said the study. As of 2021, the latest data available, the top three states that have funded over 80% of their pension obligations are Wisconsin, Washington, D.C., and Nebraska. However, New Jersey, Kentucky, and Illinois have funded less than 42% of their obligations.

What Is a Pension?

A pension is a defined-benefit retirement plan, which means that the payout during retirement is set using a specific formula. The formula is based on a few set factors, such as salary and length of service. A pension is sponsored by an employer, who guarantees a certain payment amount in retirement. This may be a 澳洲幸运5官方开奖结果体彩网:lump-sum payment or a regular monthly payment until the employee dies. If the pension comes with 澳洲幸运5官方开奖结果体彩网:death benefits, then after the employee dies, the 澳洲幸运5官方开奖结果体彩网:beneficiary (typically a surviving spouse) is pro🧸vided for, too.

To fund the pension, the employer makes regular contributions to a 澳洲幸运5官方开奖结果体彩网:tax-advantaged account for each paycheck. Employees may also make contributions, buꦅt not always.

What Is a Pension Fund?

A 澳洲幸运5官方开奖结果体彩网:pension fund is a corporate or public sector investment account that holds the assets that retirement savings depend on. Whether a single- or multi-employer plan, these accounts are regulated by the 澳洲幸运5官方开奖结果体彩💙网:Employ𒈔ee Retirement Income Security Act (ERISA) of 1974. The 澳洲幸运5官方开奖结果体彩网:Pensi🐷on Benefit Guaranty Corpo🐻ration (PBGC) protects pensi𝔉on assets in the case of insolvency.

What's the Difference Between a Pension and a 401(k)?

Both pensions and 401(k)s are employer-sponsored retirement savings plans. Pensions are defined-benefit plans, whereas 401(k)s are defined-contribution plans. This means that a pension's benefits are guaranteed, and a 401(k)'s are not. With a 401(k), the benefits depend on the performance of the investments in the account. With a pension, the benefits depend on a formula that takes into account various factors, such as salary and tenure at the company or organization.

The Bottom Line

An actuarial valuation is an analysis of the fitness of a pension fund. It tells you whether a particu🐼lar fund can pay its obligations. Anything over 1.00 (or 100%): yes. Anything under that: no.

Article Sources

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