Actuarial gain or loss, often referred to as AGL, is a financial term used to describe the difference between the current value of a pension plan’s assets and liabilities. It is the result of differences in the assumptions used in determining the net present value of benefit obligations and plan assets. Accountancy regulations stipulate the annual disclosure of pension liabilities and the assets intended to cover them; this allows investors to gauge the overall health of the fund.

All defined benefits pension plans are subject to periodic actuarial gains and losses as the key assumptions forming the model are periodically updated, and actuarial gains or losses may be encountered in the plan. A gain occurs when liabilities prove lower than originally estimated and an asset surplus results, whereas a loss occurs when liabilities are higher than anticipated and the plan experiences an asset shortfall.

Actuarial gains and losses form part of an employer’s net periodic benefit cost/credit that is included in the company’s annual income statement, and this cost/credit is reported separately from interest costs and administrative costs attributed to the defined benefit pensions plan. Depending on whether the company experiences an actuarial gain or an actuarial loss, these may have cash flow implications for the employer.

Actuarial gains and losses are typically the result of changes in actuarial assumptions such as the plan’s mortality, early retirement and actuarial cost methods. Other factors that can affect the AGL include changes to the discount rate, healthcare cost trend rates and changes in the number of people covered by the plan. If a company’s pension plan has experienced a loss, the employer must make up the shortfall or revise the plan’s payout structure.

As such, a pension plan’s AGL can be a significant point of concern for companies, particularly during times when the market is volatile. It is crucial that accurate, up-to-date data is used to value the plan’s liabilities and assets and that companies regularly review and adjust their actuarial assumptions as needed. Reviewing assumptions facilitates the accurate reporting of both current and anticipated gains and losses in a timely manner.

In summary, actuarial gain or loss (AGL) is the difference between the current value of a pension plan’s assets and liabilities. Gains are realized when plan liabilities are lower than anticipated and an asset surplus results, and losses occur when liabilities are higher than expected and the plan experiences an asset shortfall. AGL is typically the result of changes in actuarial assumptions, such as the plan’s mortality, costs and actions of plan participants, and it can have significant cash flow implications for companies. As such, it is essential that accurate data is used to value the plan’s liabilities and assets, and that assumptions are regularly reviewed and revised as necessary.