Definition
The Accrued Benefits Method is an actuarial method used to assess and account for pension costs where the actuarial value of liabilities is calculated based on:
- The benefits for current and deferred pensioners and their dependents, including future increases promised by the pension plan rules.
- The benefits expected to be received by current employees for service rendered up to the given valuation date.
Allowance may be made for expected increases in future earnings after the given date, as well as for additional pension increases not explicitly promised by the pension rules. The valuation date can either be a current date or a future date. The further into the future the given date lies, the results obtained will align more closely with those derived under a prospective benefits valuation method.
Examples
Pension Plan Valuation: A company uses the Accrued Benefits Method to evaluate its pension plan’s liabilities as of December 31, 2023. It calculates the benefits due to retirees and current employees for services rendered up to that date, including expected future increases in their salaries.
Deferred Pensioners: A deferred pensioner, John, who is yet to start receiving his pension benefits, has his future benefits calculated as part of the overall pension liability. The company includes projections of salary increases that could affect his eventual pension payments.
Frequently Asked Questions (FAQs)
What is the primary focus of the Accrued Benefits Method?
The primary focus of the Accrued Benefits Method is to allocate pension liabilities based on benefits earned up to a specific valuation date. It includes liabilities for current and deferred pensioners as well as current employees for their past service.
How are expected future increases in earnings accounted for?
Expected future increases in earnings are considered by making allowances in the calculations to reflect potential increments in employees’ earnings over time.
Can the valuation date be a future date?
Yes, the valuation date can be either a current date or a future date. The further into the future the date lies, the more akin the results will be to those of a prospective benefits valuation method.
What distinguishes the Accrued Benefits Method from other actuarial methods?
The Accrued Benefits Method specifically focuses on liabilities related to benefits earned as of a given date, whereas other methods like the Projected Unit Credit Method may focus on expected future service and salary increases.
Related Terms
Actuarial Valuation: An assessment process by actuaries to determine the present value of future pension liabilities and the financial status of a pension plan.
Pension Plan: A program established by employers to provide retirement income to employees, typically involving regular contributions and defined benefit payouts.
Prospective Benefits Valuation: An actuarial method of valuing pension liabilities based on anticipated future service and salary, providing a broader perspective than the Accrued Benefits Method.
Online References
- Investopedia - Actuarial Valuation
- The United States Government - Pension Benefit Guaranty Corporation
Suggested Books for Further Studies
- “Introduction to Actuarial Mathematics” by S.M. Ross
- “Actuarial Mathematics for Life Contingent Risks” by David C. M. Dickson, Mary R. Hardy, and Howard R. Waters
- “Pension Mathematics with Numerical Illustrations” by Howard E. Winklevoss
Accounting Basics: “Accrued Benefits Method” Fundamentals Quiz
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