Actuarial Assumption

How It Works

Actuarial assumptions are the inputs to the actuarial valuation that translates promised future pension benefits into a present-value liability measured today. Key economic assumptions include the discount rate (used to calculate the present value of future benefits), assumed investment return (historically 7.5-8%, now more commonly 6.5-7.25% per NASRA Public Fund Survey), inflation (typically 2.5-3%), and salary growth rates (typically 3-4.5%). Key demographic assumptions include mortality tables (how long retirees will live), retirement rates by age, disability rates, termination rates, and patterns of survivor benefit elections. Public plans typically use the RP-2014 or Pub-2010 mortality tables published by the Society of Actuaries, projected forward for future mortality improvement using scales like MP-2021. Overly optimistic assumptions make a pension plan appear healthier than it actually is. The Society of Actuaries' Blue Ribbon Panel on Public Pension Plan Funding (2014) and the American Academy of Actuaries have criticized historically optimistic assumptions. Aggregate public plan assumed returns have declined from roughly 8.0% in 2001 to 6.9% in 2024 per NASRA, reflecting lower expected capital market returns and forcing recognition of larger liabilities and higher required contributions. CalPERS reduced its discount rate from 7.5% in 2016 to 6.8% in 2021, increasing reported liability by tens of billions. Actuarial Standard of Practice (ASOP) 27 governs economic assumptions and ASOP 35 governs demographic assumptions; plans must formally justify each assumption and conduct experience studies every 3-5 years. Assumptions directly drive the funded ratio reported in Public Plans Database data used in the 20% pension funding factor of the CitySpend Fiscal Health Score.

Related Terms

• Funded Ratio, The percentage of a pension plan's projected liabilities that are covered by current assets. A plan with $80 in assets for every $100 in liabilities has an 80% funded ratio.
• Unfunded Liability, The difference between a pension plan's projected liabilities (what it owes to current and future retirees) and its current assets. Also called the unfunded actuarial accrued liability (UAAL).
• Discount Rate (Pension), The interest rate used to calculate the present value of future pension liabilities. A lower discount rate produces higher liabilities; a higher rate produces lower liabilities.