Actuarial Cost Method

AAA

DEFINITION of 'Actuarial Cost Method'

A method used by actuaries to calculate the amount a company must pay periodically to cover its pension expenses. The two main methods used are the cost approach and the benefit approach.

The cost approach calculates total final benefits based on several assumptions, including the rate of wage increases and when employees will retire. The amount of funding that will be needed to meet those future benefits is then determined. The benefit approach finds the present value of future benefits by discounting them.

Also known as an actuarial funding method.

INVESTOPEDIA EXPLAINS 'Actuarial Cost Method'

When reviewing a company's financial statements, it is important to look closely at the accounting for pension liabilities. This is an area with a lot of assumptions that can be manipulated. The company must make assumptions regarding the rate at which to discount future pension costs, the future rate of return on pension-plan assets, at what age the average worker will retire and the rate of future salary raises. When reviewing these assumptions, investors should note whether the company is being aggressive or conservative.

RELATED TERMS
  1. Actuarial Valuation

    An actuarial valuation is a type of appraisal which requires ...
  2. Actuarial Equity

    The calculation of an insurance premium based on crucial factors ...
  3. Commissioners Standard Ordinary ...

    An actuarial table used to compute the minimum nonforfeiture ...
  4. Pension Fund

    A fund established by an employer to facilitate and organize ...
  5. Rate Of Return

    The gain or loss on an investment over a specified period, expressed ...
  6. Funded Status

    The status of pension plan that has accumulated assets that have ...
Related Articles
  1. Pension Plans: Pain Or Pleasure?
    Retirement

    Pension Plans: Pain Or Pleasure?

  2. Insure Your Future With A Career As ...
    Home & Auto

    Insure Your Future With A Career As ...

  3. The Investing Risk Of Underfunded Pension ...
    Retirement

    The Investing Risk Of Underfunded Pension ...

  4. The Pension Bill: A Wolf In Sheep's ...
    Retirement

    The Pension Bill: A Wolf In Sheep's ...

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center