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 Gain Or Loss

    Actuarial gain or loss represents adjustments to actuarial assumptions ...
  2. Actuarial Cost Method

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

    Actuarial analysis is a type of asset to liability analysis used ...
  4. Actuary

    An actuary is a professional who assesses and manages the risks ...
  5. Actuarial Age

    Actuarial Age is an individual's life expectancy based on calculations ...
  6. Aggregate Level Cost Method

    Aggregate level cost method is an actuarial accounting method ...
Related Articles
  1. Personal Finance

    Insure Your Future with a Career as an Actuary

    If you've got excellent math skills, they can add up to a lucrative career as an actuary.
  2. Personal Finance

    The Top 5 Skills Every Actuary Needs

    The actuary profession is growing fast. Here's a look at the majors and top skills one needs to become a successful actuary.
  3. 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.
  4. Retirement

    The Investing Risk Of Underfunded Pension Plans

    Determine the risk to a company's EPS and financial condition resulting from an underfunded pension plan.
  5. 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.
  6. Retirement

    Pension Plans: Pain Or Pleasure?

    Employees have a love/hate relationship with this retirement option.
  7. Retirement

    Why Your Pension Plan Has Sovereign Debt In It

    One type of security pensions tend to invest in is sovereign debt, or debt issued by a government.
  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.
RELATED FAQS
  1. 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 >>
  2. How can a company quickly increase its liquidity ratio?

    Discover what high and low values in the liquidity ratio mean and what steps companies can take to improve liquidity ratios ... Read Answer >>
  3. What Are Some Examples of Current Liabilities?

    Look at some common examples of current liabilities a company may owe within a year or less in order to accurately assess ... Read Answer >>
Trading Center