How are defined benefit plans valued?

In order to determine the value of a benefit under a Defined Benefit Plan as of a specific date, the valuator actuarially determines the present value of receiving a future pension benefit (monthly income upon retirement). Or, said another way, the valuator determines how much money must be invested today so that when the employee retires there will be enough money in the plan so that he/she can withdraw monthly from the plan the amount of money he/she is entitled to receive for the remainder of his/her lifetime. In determining the present value, the pension appraiser takes into consideration mortality, age on date of valuation and separation, normal retirement age, the monthly entitlement upon retirement, an appropriate interest rate and etc.

For example: The Jones’ were married on April 30, 1970. Mr. Jones has been employed by the XYZ Company since April 15, 1965. On April 1, 1996, the Jones’ separated. As of the date of separation, Mr. Jones had accrued a vested benefit of $842.14 per month payable at age 62. He was born on April 2, 1940. What is the present value of Mr. Jones’ defined pension benefit? The services of a pension appraiser are secured to determine the present value of the defined pension benefit by the P.B.G.C. Actuarial and Mortality Tables Method, Life Expectancy Method, GATT Method or a Specific Method dictated by State Law.