Actuarial gains and losses definition
/What are Actuarial Gains and Losses?
Actuarial gains and losses comprise the difference between the pension payments actually made by an employer and the expected amount. A gain occurs if the amount paid is less than expected. A loss occurs if the amount paid is higher than expected. It is necessary to have expected pension amounts, due to the need to factor such issues as employee tenure and the rate of pay increases into pension calculations.
What Causes Changes in Actuarial Gains and Losses?
There are several factors that can cause changes in the reported amount of actuarial gains and losses, including the following:
Changes in economic assumptions. Lower discount rates increase the present value of liabilities, leading to actuarial losses, while higher rates decrease liabilities, resulting in gains. In addition, higher-than-expected inflation rates may increase the costs associated with benefits, increasing liabilities.
Changes in demographic assumptions. Longer life expectancies mean beneficiaries draw benefits for more extended periods, increasing plan liabilities. Also, if people retire earlier or later than expected, it impacts the timing and amount of benefits due.
Changes in assumed rates of return. Variations in actual returns on plan assets compared to assumed returns can lead to gains (if returns are higher) or losses (if returns are lower).
Changes in assumed healthcare costs. For plans covering healthcare, actual increases in healthcare costs that exceed assumptions result in losses.
Changes in plan provisions. Amendments to the benefit formula, retirement age, or eligibility requirements can impact liabilities, often recognized immediately as an actuarial gain or loss.
Regulatory changes. Regulatory shifts or changes in accounting standards can impact how actuarial gains and losses are calculated or recognized on financial statements, causing shifts in reported liabilities.
Actuarial gains and losses can have a significant impact on financial statements and cash flow planning, so they are often managed by revising assumptions or funding strategies.