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Glossary

  • Actuarial accrued liabilities (AAL)

    ​The portion of the actuarial present value of future benefits attributed to prior service by the chosen actuarial cost method.

  • Actuarially Determined Contribution (ADC)

    As defined by Government Accounting Standard (GASB) No. 67: A target or recommended contribution to a defined benefit pension plan for the reporting period, determined in conformity with Actuarial Standards of Practice based on the most recent measurement available when the contribution for the reporting period was adopted. This term replaced Annual Required Contribution (ARC) as defined by GASB No. 25.

  • Alternative investment

    ​Investments other than the traditional asset classes of stocks, bonds and cash; for example, hedge funds, private equities, commodities, or derivatives. Note that views differ on which asset classes constitute “alternative” investments.

  • Amortization method

    The method used to amortize the UAAL in the development of the ARC or the annual contribution rate. Typically level dollar or level percent of payroll over a fixed number of years (may not exceed 30 years for the ARC under GASB accounting standards).

  • Annual Required Contribution (ARC)

    ​As defined by Government Accounting Standard (GASB) No. 25, this is the sum of the Normal Cost and the chosen amortization of the UAAL, adjusted with interest to the end of the reporting year. Note that the newer GASB No. 67 does not use this term, instead using Actuarially Determined Contribution (ADC).

  • Asset allocation

    ​The percentage of invested assets allocated to different investment classes; for example, equities, fixed income, cash equivalents, real estate, etc.

  • Assets at market valuation (MVA) - also Market Value of Assets

    ​The value of plan assets at true market value as of a given date; the price at which the assets would be traded by a willing buyer and seller.

  • Benchmark rate of return

    ​An external standard of investment performance used to compare against a plan’s actual investment performance. Based on a feasible alternative to a plan’s established asset allocation, typically it uses recognized and published investment options (for example, the Standard and Poor’s 500 stock index and bond indices).

  • Cost of Living Adjustment (COLA)

    ​A recurring or ad hoc increase to a member’s retirement income intended to preserve purchasing power to the retired member. Often based upon a cost of living or purchasing index, for example, the Consumer Price Index. COLAs may be a percentage of the index and are often capped; for example, 50% of CPI but not greater than 2%.

  • Discount rate

    ​The reduction to the value of a future benefit payment to reflect the time value of money, expressed as an annualized percentage. There are two differing rationales for the development of the discount rate: expected rate of return and market-based. The former is derived as the expected investment return on the assets available to pay benefits, and typically is determined based on the expected distribution of those assets by investment class. This approach is typically used for determining contribution rates, but may also be used to disclose the plan’s accrued liabilities. The latter is usually based on a yield curve of observable rates derived from fixed-income securities (typically bonds) available in the capital markets that have similar risk and payment characteristics to the future pension payments. For public pension plans, this is typically used not to determine contributions, but may be used to disclose the plan’s accrued liabilities.

  • Entry age normal (EAN) cost method – also Entry Age Cost Method

    ​An actuarial cost method under which the actuarial present value of future benefits and expenses of each individual included in the valuation is allocated on a level basis over the earnings or service of the individual between entry age (the date of hire or the date of plan entry) and the assumed exit or retirement age(s).

  • Funding ratio

    ​The value of assets divided by the AAL, under various measures of both (see illustrative dashboards).

  • GASB 67 actuarial accrued liability

    ​The AAL determined by the Entry Age Cost Method.

  • Mortality assumptions

    ​Estimated or projected rates of death among plan participants, usually differentiated by gender and attained age, sometimes by employment class (e.g., blue collar or white collar), and sometimes with an expectation of improvement (i.e., a reduction in the rate of death) between the experience period and the expected date of benefit payment.

  • Normal cost

    ​The portion of the actuarial present value of future benefits and expenses allocated to the current valuation year by the chosen applicable cost method.

  • Unfunded AAL (UAAL)

    ​The portion of the AAL (measured in dollars) not covered by the plan assets, usually based on a comparison with the AVA.