Actuarial Cost Method

System for calculating the relationship between a pension plan's present cost and its present future benefits. This relationship shows the extent to which a pension plan's benefits are funded. The objective is to identify on a year-by-year basis the cost of benefits accrued for the particular year. To illustrate, a relationship of 1.0 shows that there is 100% funding available for the pension plan's benefits.

Technique used by actuaries to determine the periodic employer contribution to the pension plan; also called actuarial funding method. It is used to measure pension expense and related funding. Two general approaches are usually considered when selecting an actuarial funding method, the cost approach and benefit approach. The cost approach projects an estimated total retirement benefit and then determines the level cost that will be adequate (including expected interest) to furnish total benefits at retirement. The benefit approach determines the amount of pension benefits attributable to service to date and then determines the present value of these benefits. See also Actuarial Gains, Losses.