What Is the Aggregate Level Cost Method?
The aggregate level cost method refers to an actuarial accounting method that tries to match and allocate the cost and benefit of a pension plan over the span of the plan's life. The aggregate level cost method typically takes the present value of benefits minus asset value and spreads the excess amount over the future payroll of the participants.
BREAKING DOWN Aggregate Level Cost Method
Aggregate cost methods take into account the whole group, and the cost of the plan is usually calculated as a percentage of yearly payroll. In addition, the percent is adjusted yearly if there are any actuarial gains or losses.
The Actuarial Standards Board defines what it calls the Aggregate Actuarial Cost Method as:
"A method under which the excess of the actuarial present value of projected benefits of the group included in an actuarial valuation over the actuarial value of assets is allocated on a level basis over the earnings or service of the group between the valuation date and assumed exit."
"This allocation is performed for the group as a whole, not as a sum of individual allocations. That portion of the actuarial present value allocated to a valuation year is called the normal cost. The actuarial accrued liability is equal to the actuarial value of assets."
How to Do the Aggregate Level Cost Method
Calculating costs and benefits using the aggregate level cost method involves a series of steps. First, the pension plan's benefits are examined according to the total amount, total cost, and the time of contingent payment, according to MBASkool. "After this, the cash flows are then discounted to present value and after that they are added together."
Next, using the probability of payment discounts or adjustments are made. Now, some of the liabilities are disjointed, such as current death benefits or a past service liability. After this, factors pertaining to amortization are applied to some of the supplemental liabilities. Now, a 'spread' factor is added to the normal liabilities to find out the fund normal cost.
"Unlike individual level cost method, aggregate level cost method takes into account the whole group," the site explains. "Generally, the cost of the pension plan is calculated as a percentage of the yearly payroll. Also, to take into account of any actuarial gain or losses, the percentage (of the yearly payroll) is changed or adjusted. Hence, aggregate level cost method overcomes many challenges and limitations pertaining to the individual level cost method."