Actuarial Gain or Loss

What is Actuarial Gain or Loss?

Actuarial gains or losses are the difference between the pension payments made by an employer and the expected amount. It can be understood well if one takes a look at the context of pension Accounting. Accounting rules of the company will showcase the pension obligations, i.e. liabilities and the assets that will cover them. The investors would be able to understand the overall health of the pension fund.

In simple words, if the amount actually paid by the employer is lesser than the expected amount, gain occurs. If the amount paid is more than the expected, a loss occurs.

Components of Actuarial Gains or Losses

1. Impact of Change in Assumptions

This is based on various assumptions such as financial and demographic assumptions. The amount is paid accordingly.

• Financial Assumption: The discount rate and the salary growth rate of the employee are included in Financial Assumption. This depends on the economic scenario in which the company operates.

• Demographic Assumption: Demographic assumptions include mortality rate and attrition rate. This relies on the company, HR policy, the past experiences and its expectations from the future.

2. Experience Adjustments/ Variance

The experience adjustment is reflected when the closing liability of any change at the time of the accounting period takes place. This happens between the valuation assumption taken in the opening valuation and the actual experience.

How to Minimize Actuarial Gain and Losses?

It is now obvious that a decrease in the amount of actuarial gain or losses will be a benefit for the employee. In order to minimize this, assumptions are used. All other assumptions are decided by the management in consulting actuaries and other auditors. Consultation plays a vital role in decision-making.