What is the Aggregate Level Cost Method?

The Aggregate level cost method is a method that matches and allocates the cost and benefit of a pension plan over the span of its life. It is a form of actuarial accounting in which the present value of a pension benefit is deducted from the asset value and the excess amount spreads over future payment for participants of the pension plan.

How is the Aggregate Level Cost Method Used?

The Actuarial Standards Board (ASB) defines the Aggregate Level Cost Method as follows; "A method under which the excess of the actuarial present value of projected benefits of the group included in an actuarial valuation over the actuarial value of assets is allocated on a level basis over the earnings or service of the group between the valuation date and assumed exit. The Aggregate level cost method is different from the individual level cost method given that it takes the entire participants into account and not just an individual. In this method, the cost of a pension plan is estimated as a percentage of the yearly payroll disbursed to participants. When losses or gains are recorded in a year, the percentage is adjusted to reflect these changes. How to do aggregate level cost method When using the aggregate level cost method to calculate the cost and benefits of pension plans, there are some steps that must be followed. These include:

• Accounting for the total amount, total cost and time of payment of the pension plan.
• Analysis of all benefits of the pension plan.
• Discounting cash flows to the present value. Using the probability of payment discounts or making adjustments.
• Applying factors of amortization to some liabilities, and others.

In general, in the aggregate level cost method, the cost of the pension plan is calculated as a percentage of the yearly payroll. This method also accounts for any actuarial gain or losses in order to adjust the annual payroll to suit the changes.