Actuarial Valuation of Pension Funds

Actuarial valuation is a periodic financial assessment of whether a pension arrangement has sufficient resources to meet promised benefits. In a defined-benefit pension fund, an actuary estimates the present value of future pension payments using demographic and financial assumptions, then compares that liability with the fund's assets. The promised benefit is usually determined by a formula linked to factors such as salary and length of service, so the sponsor generally bears the principal funding risk.

How the valuation is made

An actuary first projects the benefits attributable to service already rendered and then discounts the expected future payments to the valuation date.

• Demographic assumptions cover mortality, longevity, retirement and employee turnover.
• Financial assumptions commonly cover salary growth, pension increases and the discount rate.
• The fund's assets are valued and compared with the present value of accrued pension obligations.

What the result shows

The comparison indicates the plan's funded status. If actuarial liabilities exceed plan assets, there is an actuarial deficit; if assets exceed liabilities, there is a surplus.

• The valuation helps determine sustainable employer contributions and any measures needed to address a funding gap.
• For an unfunded arrangement, the exercise estimates the pension obligation even though no separate pool of plan assets exists.

Why estimates change

Actuarial valuation is an estimate rather than a fixed prediction. Results change when experience differs from assumptions or when assumptions, benefit rules or asset values change.

• Greater-than-assumed longevity can increase liabilities because pensions may be paid for longer.
• A lower discount rate generally raises the present value of future pension obligations.
• Regular valuations support funding discipline, financial reporting and assessment of long-term fiscal sustainability.