Actuarial Valuation

In Detail

An actuarial valuation is the comprehensive financial checkup that pension plans undergo regularly — annually for most private-sector plans, and annually or biennially for public plans. The actuary examines the plan's assets, projects future benefit obligations using demographic and economic assumptions, and determines whether the plan has enough money to pay its promises. The valuation report includes the plan's funded ratio, unfunded liability, normal cost, and the recommended employer contribution for the coming year or biennium. The valuation process involves significant professional judgment.

The actuary must select or validate assumptions about investment returns, salary growth, employee turnover, retirement patterns, and mortality — each of which can materially affect the results. Two actuaries examining the same plan with different assumptions can produce dramatically different funded ratios. This is why transparency about assumptions is critical for plan participants and taxpayers. Actuarial valuations for public plans are typically made publicly available and are a primary data source for PensionWatch.

Private-sector valuations are filed with the IRS and DOL as part of the Form 5500 annual reporting process. Reading and understanding your plan's actuarial valuation is one of the best ways to assess the security of your retirement benefits.