Actuarial Gain Or Loss

Rules of pension accounting: The good people over at the Financial Accounting and Standards Board (FASB) created rule No. 87, requiring firms to report on their pension plans performance and financial condition.

If the pension payouts in the reporting period are larger than the expected amount, there is an actuarial loss. If the pension payouts are smaller than expected, then there is an actuarial gain. Actuarialists are accountants who specialize in calculating the consequences of risk.

Why is this important? Because these pension plan gains and losses are reported on the financial statements of a company.

And it is even more important because half of the equation, the expected amount, is calculated by an actuary and can be manipulated. The expected amount to be paid out is a projected benefit obligation and is calculated on a set of assumptions. Assumptions include estimates on things like mortality rates, retirement rates, returns on investment, interest rates and inflation rates. You gotta be God-like, or at least a Harvard MBA, to know those things.

If the assumptions change, the projected benefit obligation changes, and this affects the gains or losses, and this affects the financial statements, and this affects…well, everything.