Aggregate Level Cost Method

Posted in Finance, Accounting and Economics Terms, Total Reads: 810
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Definition: Aggregate Level Cost Method

This method is mainly used in the context of pension plans for calculation of the cost and benefit associated with a particular pension plan. An aggregate level cost method calculates the cost and benefit of a particular pension plan over the entire term of the plan’s life. It is different from the individual level cost method.

The six main steps while calculation of cost and benefit using aggregate level cost method are:

1) All benefits of the pension plan are analyzed as follows: the total amount, total cost and the time of (contingent) payment.

2) After this, the cash flows are then discounted to present value and after that they are added together.

3) Now, using the probability of payment discounts or adjustments are made.

4) Now, some of the liabilities are disjointed, such as current death benefits or a past service liability.

5) After this, factors pertaining to amortization are applied to some of the supplemental liabilities.

6) Now, a "spread" factor is added to the normal liabilities to find out the fund normal cost.

 

Unlike individual level cost method, aggregate level cost method take into account the whole group. Generally, the cost of the pension plan is calculated as a percentage of the yearly payroll. Also, to take into account of any actuarial gain or losses, the percentage (of the yearly payroll) is changed or adjusted. Hence, aggregate level cost method overcomes many challenges and limitations pertaining to the individual level cost method.

Aggregate level cost method is also known as Percent of payroll method or Remaining Cost method. Some of the characteristics of the method are: Aggregate, Single Benefit, Level percentage of payroll and projected benefit.

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