A DB plan provides a formula to calculate the monthly check that employees will receive after retirement. Since retirement may occur many years from now, computing the amount that should be set aside today is complicated and relies on assumptions about the future. Due to the complexity, actuaries help determine how employers should pay into a plan each year.
The actuaries rely upon assumptions about when the payments are likely to start (that is, when people will actually retire), how long the payments are likely to be paid (how long will people live?), the amount of a person’s compensation at the time of retirement, how much of the retirement benefits will be paid from investment earnings, rates of inflation, etc.
Obviously, DB plans are complex and, monitoring their status from year-to-year is difficult. For this reason, actuarial and funding adjustments should be considered every year.
Source: PFM Group Consulting report, May 22, 2017. For more information about this topic, click here to see relevant portions of that report.