Harness Money

What is actuarial gain or loss?

Actuarial gain or loss refers to the changes in the present value of a defined benefit pension plan’s projected benefit obligations (PBO) resulting from the revaluation of actuarial assumptions and other factors. It is a key concept in actuarial accounting and reflects the variations between expected and actual outcomes.

When a defined benefit pension plan is established, various assumptions are made regarding factors such as the discount rate, salary increases, mortality rates, and retirement patterns. Actuarial gain or loss arises when the actual experience differs from these assumptions.

If the actual experience turns out to be more favorable than anticipated, such as employees retiring later or investment returns exceeding expectations, it leads to an actuarial gain. On the other hand, if the actual experience is less favorable, such as employees retiring earlier or investment returns falling short, it results in an actuarial loss.

Actuarial gains and losses are recognized in the financial statements of the employer sponsoring the pension plan. They can have significant implications for the company’s financial position, particularly for the funded status of the plan and the calculation of pension expense.

In accounting, actuarial gains and losses are typically amortized over time to smooth their impact on financial statements. This process is known as the corridor approach, which sets a threshold for recognizing the gains and losses. If the cumulative actuarial gains or losses exceed the threshold, the excess is amortized over the expected remaining service lives of plan participants.

Actuarial gains and losses play a crucial role in assessing the financial health of defined benefit pension plans and determining the funding requirements. They reflect the inherent uncertainties and fluctuations associated with actuarial assumptions and act as a means to align the plan’s financial reporting with the actual experience over time.