A PRACTICAL APPROACH TO GAINS ANALYSIS

The pension actuary has always been on unsure ground in attempting to identify by source experience gains (and losses) in a pension plan. His approach as usually been more intuitive than scientific. The purpose of this paper is to describe an actuarially acceptable and mathematically definitive method for allocating ains by source. T HE pension actuary's interest in gains analysis has been heightened by the new requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Not only must the experience gain or loss of a pension plan be reported (unless an aggregate cost method is used), but the enrolled actuary must certify that in his opinion the valuation assumptions "(i) are in the aggregate r asonably related to the experience of the plan and to reasonable expectations; and (ii) represent his best estimate of anticipated experience under the plan. ''1 It is now more important than ever for him to evaluate and understand the effect on the plan experience of the actuarial assumptions, and, by implication, the effect of each assumption. This paper will describe a general approach to gains determination that is not only mathematically correct but practical as well. The approach is essentially automatic and can be used for any pension plan, regardless of complexity or funding method. The approach also allows the pension actuary to determine the experience changes in a pension plan by source with such accuracy that any deviation between the sum of the individual-ly determined changes and the total change invariably can be traced to faulty valuation technique. The paper is organized in four parts. The first part deals with plans funded on an individual cost method, such as entry age normal or unit credit. The second part covers plans funded on an aggregate cost method, such as the frozen initial liability method. The third part describes the individual calculations that underlie the analysis of the change in values by source. The fourth part summarizes the first three parts.