What is the primary purpose of an actuarial valuation?

The primary purpose of an actuarial valuation is to calculate required contributions to pay benefits. This process involves analyzing the financial status of a pension plan or other benefit scheme to ensure that there are sufficient funds to meet future obligations. Actuaries use various assumptions and statistical models to evaluate long-term financial sustainability, taking into account factors such as current assets, projected investment returns, demographic trends, and expected benefit payouts.

This calculation is crucial for both employers and employees, as it informs decision-making regarding contribution rates, funding strategies, and overall management of the benefit plan. By assessing the value of future liabilities, the actuarial valuation enables organizations to plan effectively for the financial implications of the benefits they offer, ensuring they can meet their commitments.

In contrast, assessing historical costs of benefits focuses on past expenditures rather than future needs, determining insurance premiums is a specific aspect of insurance rather than broader benefit planning, and estimating future employment levels is not directly related to the financial evaluation of benefit obligations. These elements may be relevant in certain contexts but do not encapsulate the core objective of an actuarial valuation, which is fundamentally about ensuring sufficient contributions are made to secure future payouts.