Define: Actuarial Cost Method

The Actuarial Cost Method is a technique used in pension accounting to determine the amount of money that needs to be set aside by an employer to fund future pension obligations. It involves calculating the present value of expected future pension benefits and then determining the annual contributions required to fund those benefits over the employees’ working years.

The Actuarial Cost Method takes into account various factors such as the employees’ age, salary, expected retirement age, and mortality rates. It aims to ensure that the pension plan remains adequately funded and that the employer can meet its pension obligations in the future.

There are different types of Actuarial Cost Methods, including the Entry Age Normal method, the Projected Unit Credit method, and the Aggregate method. Each method has its own assumptions and calculations, but they all aim to provide a reasonable estimate of the employer’s pension funding requirements.

The Actuarial Cost Method is an important tool for employers and pension plan administrators to manage their pension liabilities and make informed decisions about pension contributions. It helps ensure that pension plans are financially sustainable and can provide the promised benefits to employees upon retirement.

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This glossary post was last updated: 29th March 2024.