What it means
At the start of each year, the actuary projects what the obligation should be at the end of the year: the opening balance plus service cost for another year of employee service, plus interest as the payments come one year closer, less benefits paid out. That projection is the expected closing obligation.
At year end, the obligation is remeasured for real. Members retired earlier or later than assumed, salaries rose faster or slower, people lived longer, and the discount rate moved; the gap between the expected figure and the remeasured figure is the actuarial gain or loss.
The same idea applies on the asset side. If plan assets earn more than the expected return, the difference is an actuarial gain, and if they earn less it is a loss, which is why actual return on plan assets is tracked so carefully.
Under current accounting rules these remeasurements are usually reported in other comprehensive income rather than in profit or loss. That keeps a volatile, market-driven number out of the earnings line while still showing it in the equity position, which is why a company can post record profits and a much worse balance sheet in the same year.
The nuance is that a loss is not necessarily bad management. A discount rate cut driven by falling bond yields creates an accounting loss for every scheme in the country at once, and no employer action caused it or could have prevented it.
It also helps to remember that the reported figure is a net number. Several offsetting movements sit inside it, so a small headline loss can conceal a large longevity loss cancelled out by a large gain from a rising discount rate.
Anyone using the number to judge a scheme should ask for the components rather than accepting the total.
In practice
Real-world examples.
Example
A utility company reports an actuarial loss of $1,100,000 after its actuary adopts an updated mortality table. Profit is unaffected, but the balance sheet deficit widens and the trustees open discussions about higher contributions.
Example
A retailer records an actuarial gain when a wage freeze holds salary growth below the assumed rate for two consecutive years. The projected benefit payments fall and the deficit narrows without any extra cash being paid in.
Example
A manufacturer's plan assets return 10% against an expected 7%, producing an actuarial gain on the asset side. The finance team explains to the board that the gain sits in other comprehensive income and does not flatter operating profit. The trustees still decline to cut contributions on the strength of one good year.
Formula
Calculation
Expected Closing Obligation = Opening Obligation + Service Cost + Interest Cost - Benefits Paid, and Actuarial Gain or Loss = Actual Closing Obligation - Expected Closing Obligation. A scheme opens the year with an obligation of $24,000,000. Service cost for the year is $1,200,000, the discount rate is 5% so interest cost = 5% x $24,000,000 = $1,200,000, and benefits paid are $400,000. Expected closing obligation = $24,000,000 + $1,200,000 + $1,200,000 - $400,000 = $26,000,000. The actuary remeasures the obligation at year end and arrives at $27,100,000. Actuarial loss = $27,100,000 - $26,000,000 = $1,100,000, recognised in other comprehensive income.Case study
Seen in the real world.
The following is an illustrative and fictional example. Kessington Rail Services, an invented engineering contractor, reported operating profit up 12% while its shareholders' funds fell by $1,100,000. Several board members assumed an accounting error.
The cause was an actuarial loss. The scheme's expected closing obligation had been $26,000,000, built from a $24,000,000 opening balance, $1,200,000 of service cost and $1,200,000 of interest cost less $400,000 of benefits paid, but remeasurement produced $27,100,000 because members were living longer than the previous table assumed.
In this fictional case the finance director added a one-page bridge to the board pack each year, splitting movements into experience differences, assumption changes and asset performance. Directors stopped confusing pension remeasurement with trading performance, and the annual argument about the pension note disappeared.
Watch out
Common mistakes.
- Reading an actuarial loss as evidence of poor trading, when it usually reflects assumption changes or market movements outside management control.
- Expecting the gain or loss to run through profit, when current standards route pension remeasurements through other comprehensive income.
- Looking only at the obligation side and ignoring that asset returns above or below expectation also generate actuarial gains and losses.
Questions
People also ask.
What causes actuarial gains and losses?
Two things: experience differing from what was assumed, and the assumptions themselves being revised at the measurement date.
Does an actuarial loss mean cash must be paid immediately?
No, it changes the reported obligation, and any extra cash depends on a separate funding agreement with the trustees.
Can gains and losses reverse in later years?
Yes, they frequently do, because discount rates and market values move in both directions over time.
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