Actuarial gains and losses are the differences between what a pension plan’s actuary predicted and what actually happened, together with the effects of revising long-term assumptions about investment returns, employee lifespans, salaries, and discount rates. They arise every year because no forecast matches reality exactly. How a company recognizes them depends on whether it reports under U.S. GAAP or IFRS, and the choice affects reported earnings, the funded status shown on the balance sheet, mandatory cash contributions, and PBGC premiums.
What Causes Them
The gains and losses fall into two categories with different causes.
Experience adjustments capture what actually happened during the prior year against the actuarial forecast. If plan investments returned 8% while the actuary assumed 5%, the plan experienced a gain. If several retirees died earlier than projected, future payment obligations dropped, producing another gain. Experience adjustments deal in hard data from the recent past.
Assumption changes are the second source. When an actuary concludes future conditions will differ from prior projections, the model is revised. Updated longevity data showing retirees are living two years longer than previously estimated increases the projected payout obligation immediately. A downward revision to the discount rate has a similar effect, inflating the present value of every future payment. Assumption changes can dwarf experience adjustments because they ripple through every future year of projected benefits.
The Variables That Drive the Number
The projected benefit obligation (PBO) is the present value of all future pension payments the company expects to owe. Several interrelated variables set that number, and a shift in any one produces a new actuarial gain or loss.
Economic Variables
The discount rate is the most powerful lever. It converts future payment streams into a present-day figure, so a decrease of even half a percentage point can add millions to a large plan’s liabilities. Companies select the rate based on yields of high-quality corporate bonds with maturities matching the expected timing of benefit payments.
Expected return on plan assets matters because the plan’s investments are meant to generate enough growth to cover future benefits. When actual returns fall short of the assumed rate, the shortfall feeds directly into the actuarial loss for that year. Salary growth assumptions also factor in, because many pension formulas base retirement benefits on an employee’s final average pay. If wages rise faster than anticipated, future benefit checks grow with them.
Demographic Variables
Mortality rates dictate how many years of payments each retiree will collect. The IRS publishes updated static mortality tables that defined benefit plans use for minimum funding calculations, and the tables applicable to 2026 plan years appear in IRS Notice 2025-40.1Internal Revenue Service. Notice 2025-40 – Updated Static Mortality Tables for Defined Benefit Pension Plans for 2026 When tables reflect longer life expectancies, benefit obligations rise.
Employee turnover assumptions affect how many workers stay long enough to vest. If fewer employees leave than expected, more of them earn full pension rights and the total obligation grows. Retirement age assumptions determine when cash outflows begin; lowering the assumed retirement age by even one year accelerates the start of payments and increases the PBO.
Companies that provide retiree health insurance face an additional layer. The assumed health care cost trend rate drives the accumulated postretirement benefit obligation, and a small change in the long-term trend assumption can shift that obligation significantly.
Recognition Under U.S. GAAP
U.S. GAAP gives companies some flexibility in how quickly actuarial gains and losses flow through the financial statements. ASC 715 offers approaches ranging from immediate recognition to multi-year smoothing.
Immediate Recognition
A company can recognize the entire actuarial gain or loss in the income statement in the period it arises. This produces the most transparent result, but it also creates the most volatility. A bad year in bonds or equities can drive a pension-related swing that overshadows operating performance. Some companies accept the trade-off for simplicity.
The Corridor Approach
Most companies that prefer smoother earnings use the corridor method. Actuarial gains and losses first accumulate in accumulated other comprehensive income (AOCI) on the balance sheet. Only the portion that exceeds a 10% corridor must be amortized into earnings. The corridor equals 10% of the greater of the PBO or the market-related value of plan assets, measured at the beginning of the year. Any net gain or loss inside AOCI below that threshold stays parked there indefinitely.
When the accumulated amount does exceed the corridor, the excess is amortized over the average remaining service period of active employees expected to receive benefits. If most or all participants are already retired, the company instead amortizes over the average remaining life expectancy of those inactive participants. Large one-time swings do not immediately distort reported profit, but significant deviations still reach the income statement eventually.
Asset Smoothing
The market-related value of plan assets used in the corridor calculation does not have to equal the actual fair value of the portfolio. ASC 715 allows a smoothed value that phases in investment gains and losses over a period of up to five years. A plan that suffered a steep market loss in one year can spread the impact across five annual periods, reducing the chance that a single bad quarter triggers corridor-exceeding losses.
Recognition Under IFRS
International Financial Reporting Standards take a different approach. Under IAS 19, actuarial gains and losses bypass the income statement entirely and are recognized in other comprehensive income.2IFRS Foundation. IAS 19 Employee Benefits The main profit-and-loss statement stays clean of pension volatility while the balance sheet still updates to reflect reality.
The critical difference from U.S. GAAP is that these OCI amounts are permanent. IAS 19 prohibits reclassifying remeasurements from OCI to profit or loss in any future period.2IFRS Foundation. IAS 19 Employee Benefits The amounts can be shuffled within equity accounts, but they never flow through earnings the way they do under the U.S. corridor method. There is no amortization mechanism and no corridor threshold. The equity section quietly absorbs large pension-related fluctuations that investors have to watch for themselves.
Balance Sheet Presentation
No matter how a company recognizes gains and losses through income, U.S. GAAP requires the full funded status of each defined benefit plan on the balance sheet. Funded status is the difference between the fair value of plan assets and the benefit obligation. For pension plans, that obligation is the PBO; for postretirement benefit plans, it is the accumulated postretirement benefit obligation.3Financial Accounting Standards Board. Statement of Financial Accounting Standards No 158 – Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
A company that sponsors multiple plans cannot net an overfunded plan against an underfunded one. The aggregate funded status of all overfunded plans appears as an asset, and the aggregate funded status of all underfunded plans appears as a liability.3Financial Accounting Standards Board. Statement of Financial Accounting Standards No 158 – Employers Accounting for Defined Benefit Pension and Other Postretirement Plans A company with one plan $50 million overfunded and another $30 million underfunded shows both a $50 million asset and a $30 million liability, not a net $20 million asset. Unrecognized actuarial gains and losses awaiting amortization sit in AOCI on the equity side.
Settlements and Curtailments
Certain plan events force actuarial amounts out of AOCI and into earnings faster than the corridor method would otherwise allow.
Settlements
A settlement occurs when a company takes an irrevocable action that eliminates a portion of its pension obligation and the associated risks. Buying annuity contracts from an insurer to cover a group of retirees is the classic example. On settlement, the company recognizes a proportional share of the actuarial gains and losses in AOCI, based on the fraction of the total PBO that was settled.
There is a practical threshold. Settlement accounting is required only when the total cost of settlements during the year exceeds the combined service cost and interest cost components of net periodic pension cost for that year. Below that threshold, settlement recognition is permitted but not mandatory. Companies that routinely pay lump sums to departing employees should track those payments against the threshold, because once it is exceeded, all settlements for the year require recognition.
Curtailments
A curtailment happens when a company significantly reduces the expected years of future service for current employees or eliminates the accrual of benefits for a large portion of the workforce. Plant closings, mass layoffs, and plan freezes are common triggers. The accounting differs from settlements: instead of a proportional share, the company compares the change in the PBO caused by the curtailment against the unrecognized gain or loss in AOCI. If the curtailment decreases the PBO and there is already an unrecognized loss in AOCI, the gain offsets that loss first, and only the excess is recognized as a curtailment gain. A curtailment loss is recognized in full when it is probable and reasonably estimable.
Funding, Premium, and Tax Consequences
Accounting recognition is one question. Cash out the door is another. Actuarial losses change more than the numbers on a financial statement; they increase the real money a company must contribute under federal law.
Minimum Contributions for Single-Employer Plans
For single-employer defined benefit plans, IRC Section 430 sets the minimum required contribution. When plan assets fall below the funding target, the employer must contribute the normal cost of the plan for the year plus a shortfall amortization charge.4Office of the Law Revision Counsel. 26 USC 430 – Minimum Funding Standards for Single-Employer Defined Benefit Pension Plans The shortfall charge is based on the gap between the funding target and the value of plan assets. A large actuarial loss widens that gap and directly increases the mandatory contribution.
The shortfall is amortized in level annual installments. The original statutory period was seven years, though legislation effective for plan years beginning after 2021 extended this to 15 years for most plans.4Office of the Law Revision Counsel. 26 USC 430 – Minimum Funding Standards for Single-Employer Defined Benefit Pension Plans Even with the longer window, a sudden spike in the PBO from revised mortality assumptions or a market downturn can force millions in additional contributions over the following years.
Interest Rate Stabilization
The discount rates used for funding calculations are not entirely market-driven. Federal law requires the 24-month average segment rates to fall within a corridor of 95% to 105% of the corresponding 25-year average segment rates for plan years beginning in 2026.5Internal Revenue Service. Pension Plan Funding Segment Rates When market rates drop sharply, the corridor floor keeps the funding discount rate from falling as far, limiting the size of the resulting actuarial loss for funding purposes.
Multiemployer Plans
Multiemployer plans follow a different framework under ERISA. Their funding standard account must be charged with the amounts needed to amortize net experience losses and net losses from changes in actuarial assumptions over 15 plan years.6Office of the Law Revision Counsel. 29 USC 1084 – Minimum Funding Standards for Multiemployer Plans If charges exceed credits and an accumulated funding deficiency develops, contributing employers must increase their payments to close the gap.
PBGC Premiums
Underfunding carries a direct cost beyond the contributions themselves. The Pension Benefit Guaranty Corporation charges single-employer plans a flat-rate premium of $111 per participant for 2026 plan years, plus a variable-rate premium of $52 per $1,000 of unfunded vested benefits.7Pension Benefit Guaranty Corporation. Comprehensive Premium Filing Instructions for 2026 Plan Years A plan that suffers a large actuarial loss and becomes significantly underfunded will see its premium bill climb the following year. For a plan with $100 million in unfunded vested benefits, the variable-rate premium alone comes to $5.2 million annually.
Deductibility and the Reversion Tax
Employer contributions to a defined benefit plan are tax-deductible within limits tied to actuarial funding requirements. For 2026, the annual benefit payable from a defined benefit plan cannot exceed $290,000 per participant, and annual compensation considered in plan calculations is capped at $360,000.8Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs These limits constrain both the benefits the plan can promise and the deductible contributions the employer can make.
When actuarial losses drive up required contributions, the increased funding obligation is generally deductible. The reverse situation creates a different tax problem. If persistent actuarial gains leave a plan overfunded and the employer terminates the plan to recapture the surplus, the reversion triggers a 20% excise tax on the amount recovered. That rate jumps to 50% unless the employer establishes a qualified replacement plan or provides pro rata benefit increases to participants.9Office of the Law Revision Counsel. 26 USC 4980 – Tax on Reversion of Qualified Plan Assets to Employer Combined with regular income tax on the reversion, the effective tax rate can approach 100% of the surplus. Companies have little incentive to withdraw gains from an overfunded plan and strong incentive to manage actuarial surpluses through benefit improvements or contribution holidays instead.