Aggregate Level Cost Method
What Is the Aggregate Level Cost Method?
The aggregate level cost method alludes to a actuarial accounting method that attempts to match and designate the cost and benefit of a pension plan over the span of the plan's life. The aggregate level cost method regularly takes the current value of benefits minus the asset value and spreads the excess amount over the future payroll of the participants.
How the Aggregate Level Cost Method Works
Aggregate cost methods consider the whole group, and the cost of the plan is normally calculated as a percentage of yearly payroll. What's more, the percent is adjusted yearly assuming that there are any actuarial gains or losses.
As per the Actuarial Standards Board (ASB), the definition of the aggregate actuarial cost method is: "A method under which the excess of the actuarial present value of projected benefits of the group remembered for an actuarial valuation over the actuarial value of assets is allocated on a level basis over the earnings or service of the group between the valuation date and assumed exit. This allocation is performed for the group as a whole, not as a sum of individual allocations. That portion of the actuarial present value allocated to a valuation year is called the normal cost. The actuarial accrued liability is equivalent to the actuarial value of assets."
The Actuarial Standards Board (ASB) is affiliated with the American Academy of Actuaries. The ASB is entrusted with laying out and further developing standards of actuarial practice, and its goal is to set standards for fitting practice for the United States. The Actuarial Standards of Practice (ASOPs) that the ASB sets forward distinguish what the actuary ought to consider, document, and uncover while playing out an actuarial assignment.
The aggregate cost level method is unique in light of the fact that, dissimilar to the individual cost method, it considers the plan's all's participants (as opposed to just the individual). Generally, the cost of the pension plan is calculated as a percentage of the yearly payroll. The percentage of the yearly payroll is changed or adjusted to consider any actuarial gain or losses. Thus, the aggregate level cost method beats many difficulties and limitations relating to the individual level cost method.
While ascertaining the cost and benefits of pension plans, these steps are followed:
- Accounting for the total amount, total cost, and the hour of payment for the pension plan.
- Examining all benefits of the pension plan.
- Discounting cash flows to the current value and add them together.
- Utilizing the likelihood of payment, make discounts and adjustments.
- A portion of the liabilities are disconnected, for example, current death benefits or past service liability.
- Applying factors relating to amortization are applied to certain liabilities.
- A 'spread' factor is added to the normal liabilities to figure out the asset's normal cost.
- The Actuarial Standards Board characterizes what it calls the Aggregate Actuarial Cost Method.
- One step in the method analyzes the pension plan's benefits, as per the total amount, total cost, and the hour of contingent payment.
- This method is utilized to match and designate the cost and benefit of a pension plan.
- The aggregate level cost method is an actuarial accounting method.