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While the specific calculation of the pension liability can take different forms, core principles always apply to the valuation. An individual has a unique benefit stream calculated using numerous inputs. These items include the specific plan provisions, including assumptions on mortality (e.g., how long they live), morbidity (e.g., how sick they may be), length of retirement, and employment changes (e.g., length and salary). The aggregate of all the plan participants yields

Actuaries must forecast the future along two dimensions to construct the liability: demographic and economic. The relative stability of the former contrasts starkly with the variability of the second. Demographic Assumptions – These include measures that impact the rate of participation in the plan. Critically, the plan sponsor knows most of the criteria at inception and as the plan evolves. Thus, there is a little uncertainty in their projections. Changes in the Labor Force

There are two drivers of the liability’s size. First, the forecast of the amount of cash flows payable during retirement. Second, the valuation method employed for the cash flows at the time of measurement. Both drivers contain variables that involve assumptions about future economic states that may or may not become a reality. Thus, a measurement error exists in the liability valuation. Calculating the obligated cash payments during retirement for the plan participants is th

The key to a successful defined benefit pension plan is managing risk. The pension plan is a significant employee benefit that supports retention and corporate culture in the long-term. The pension plan liability may represent a considerable proportion of the corporation's balance sheet and materially impact the income statement. Accounting for a defined benefit pension plan is notorious for its arcane regulations and the dual regimes of statutory and financial accounting. A