Actuarial Gains or Losses

Companies provide employees with a pension plan as part of a larger array of employment benefits. The FASB Statement of Financial Accounting Standards No. 87 requires firms to measure and disclose pension obligations as well as the performance and financial condition of their plans at the end of each accounting period.

Calculating the company's projected benefit obligation, or PBO, requires the skill of an actuarial to perform. The factors used by an actuarial to determine a company's PBO include mortality rates, employee retirements, salary increases, plan participation, program rules, inflation, and the rate of return on investments. Annually, companies will reevaluate the assumptions used in the determination of their PBO.

A change in the assumptions used in developing an estimate of the PBO results in an actuarial gain or loss. For example, an increase in life expectancies, early retirements, increases to the discount rate, higher than plan salary increases, and lower than expected returns on the plan's investments will increase the company's PBO. Alternatively, an increase in mortality rates, delays in retirements, decreases to the discount rate, lower than plan salary increases, and higher than expected returns on the plan's assets will decrease the company's PBO.

As was the case with prior service costs, accounting rules require companies to amortize this increase in the projected obligation to pension expense. The amortization should occur over a future time span that aligns with the average remaining future service of those participants that benefited from the amended plan.

In addition to the plan's gains and losses, the overall level of pension funding depends on variables such as the return on plan assets, interest costs, service costs, prior service costs, and changes to the plan's formula.