Actuarial Cost Method

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Actuarial Cost Method

Any method used to determine how much money the premiums to a pension must be each month. In order to remain solvent, a pension's premiums plus the return of investment must equal or exceed the amount paid out to retirees. The company managing the pension uses an actuarial cost method to calculate premiums based on that assumption. It is also called an actuarial funding method.
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The board updated the standards in 1994 with GASB 25 and GASB 27, which allowed state and local governments to use one of six actuarial cost methods to determine their actuarial liability--that is, the present value of compensation that was deferred to future years.
Projected benefit actuarial cost methods can be either individual or aggregate.
Actuarial cost method--One of the following actuarial cost methods should be used: entry age, frozen entry age, attained age, frozen attained age, projected unit credit, (10) or aggregate, as described in paragraph 41, Section B.
The actuarial cost methods and associated actuarial functions are calculated in "Pension Valuation." The formulation of the contribution rates is focused under plausible scenarios.
Under existing standards, the unfunded liability may be amortized over a period of up to 30 years using one of six acceptable actuarial cost methods; among these, the entry-age method is by far the most widely used.
Under all acceptable actuarial cost methods used to value public pension costs and liabilities, future benefit payment cash flows are discounted to a present value based on long-term expected investment returns of the pension fund.
Actuarial cost method--One of die following actuarial cost methods should he used: entry age, frozen entry age, attained age, frozen attained age, projected unit credit, (18) or aggregate, as described in paragraph 47, Section B.
Appreciation for the complexity of pension funding is increased after delving into this treatise of the numerous demographic and economic assumptions made by sponsors, along with the actuarial cost methods used.
* One of six recognized actuarial cost methods should be used.
Appendix A serves as an in depth explanation of six actuarial cost methods used with small pension plans.
Readers will recall that APBO 8 required accrual accounting but permitted pension expense to be measured using one of several actuarial cost methods.
Since SFAS 87 requires a standardized method (benefits/years of service) for measuring net periodic pension cost, in contrast to allowing any of five actuarial cost methods acceptable in the past, this required measurement is more understandable, comparable, and hence more useful than those in past practice.