What is an 'Actuarial Valuation'

An actuarial valuation is a type of appraisal of a pension fund's assets versus liabilities, using investment, economic and demographic assumptions for the model to determine the funded status of a pension plan. The assumptions are based on a mix of statistical studies and experienced judgment. Since assumptions are often derived from long-term data, unusual short-term conditions or unanticipated trends can occasionally cause deviations from forecasts.

BREAKING DOWN 'Actuarial Valuation'

Many variables go into an actuarial valuation model. On the asset side, the actuary must make an assumption about employer contribution rates and the investment growth rate for the portfolio of stocks and bonds (Level 1 and 2-type assets) and other assets (illiquid Level 3-type). The calculation of payment liabilities is much more complex. The actuary must make assumptions regarding, but not limited to, the discount rate, employee contribution rates, wage growth rates, inflation rates, mortality rates, service retirement ages, disabled retirement ages and interest on member accounts. If all the long-term assumptions are reasonable, then a realistic funding (or funded) ratio can be derived. The funding ratio equals assets over liabilities, with a ratio of over 1.00, or 100%, indicating that pension assets are sufficient to cover liabilities.

Actuarial valuations are conducted in both the private and public sectors. U.S. Steel disclosed in its 2016 annual filing that its funding ratio as of December 31, 2016, was 0.88, or 88% (plan assets of $5.48 billion divided by obligations of $6.21 billion). The company did not have enough plan assets to meet those obligations.

Some states are in tough shape due in most part to sharply higher liabilities for worker pay. (Past negotiations with state employees resulted in greater pension payment guarantees.) 2016 data from state-issued Comprehensive Annual Financial Reports (CAFR) and compiled by Bloomberg L.P. show that the median funding ratio for U.S. states was only 71% as of that year. New Jersey had the worst ratio at approximately 31%, while Wisconsin was the only state at 100%.

RELATED TERMS
  1. Actuarial Assumption

    An actuarial assumption is an estimate of an uncertain variable ...
  2. Actuarial Cost Method

    Actuarial cost method is used by actuaries to calculate the amount ...
  3. Actuarial Equivalent

    Actuarial equivalent is generally used for applying some measurement ...
  4. Actuarial Service

    Actuarial service is one way corporations determine, assess and ...
  5. Actuary

    An actuary is a professional who assesses and manages the risks ...
  6. Actuarial Risk

    Actuarial risks are the risks that assumptions actuaries implement ...
Related Articles
  1. Financial Advisor

    Career advice: Financial versus actuary analyst

    Read an in-depth comparison between financial analysts and actuaries, what it's like to work as each, and how to determine which is best for you.
  2. Personal Finance

    Career advice: accounting versus actuary

    Read about what life is like as an actuary or as an accountant, how the two careers are different, and how to decide which is best for you.
  3. Retirement

    A Primer On Defined-Benefit Pension Plans

    Most of us will rely on a pension plan in the future, so it's best to know the details of the various plans before signing up.
  4. Insights

    America’s Retirement Crisis Is Here

    The crisis has arrived and will likely be a millstone on U.S. growth for years to come.
  5. Retirement

    Pension Plans: Pain Or Pleasure?

    Employees have a love/hate relationship with this retirement option.
  6. Financial Advisor

    How Capital Gains Tax Works on Pension Funds

    Here's why capital gains tax does not affect the assets in pension funds.
  7. Investing

    Examples Of Asset/Liability Management

    In its simplest form, asset/liability management entails managing assets and cash inflows to satisfy various obligations; however, it's rarely that simple.
  8. Retirement

    How To Evaluate Pension Risk By Analyzing Annual Costs

    Learn how to assess whether a company's pension plan is posing more risks than what the footnotes indicate.
  9. Retirement

    5 Big Companies That Have Cut Out Pension Plans

    Companies are putting the responsibility of saving for retirement on the employee.
  10. Investing

    Reviewing Liabilities On The Balance Sheet

    As an experienced or new analyst, liabilities tell a deep story of how a company finances, plans and accounts for money it will need to pay at a future date.
RELATED FAQS
  1. What is the formula for calculating the current ratio?

    Find out what makes up the current ratio, how to calculate it, and what the result can tell you about a potential investment. Read Answer >>
  2. How do you calculate working capital?

    The formula for calculating working capital is straightforward, but lends great insight into the short-term financial health ... Read Answer >>
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  4. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center