Experience Adjustments vs. Assumption Changes: Where Did the Money Go?

The Source of Actuarial Volatility

When a CFO receives the year-end IAS 19 valuation report, the most scrutinized line item is the Remeasurement (the Actuarial Gain or Loss) hitting Other Comprehensive Income (OCI).

A massive loss means the liability expanded far beyond what the previous year's model predicted. To explain this to the board and the auditors, the CFO must look at the specific breakdown. IAS 19 requires actuaries to split the cause of the variance into three distinct categories:

1. Financial Assumption Changes

This explains how macroeconomic shifts altered the liability.

*Example:* The actuary lowered the discount rate from 5.5% down to 4.5% due to central bank rate cuts. Because future payouts are being discounted less heavily, the liability mathematically surges. This generates an Actuarial Loss completely outside of management's control.

2. Demographic Assumption Changes

This explains the impact of changing the underlying behavioral rules of the model.

*Example:* The HR department noticed people are staying longer, so the actuary slashed the expected turnover (withdrawal) rate from 10% to 5%. Because more people are now mathematically expected to hit their peak vesting periods, the liability spikes.

3. Experience Adjustments (The Reality Check)

This is the most critical metric for operational feedback. "Experience" measures the difference between what the actuary predicted would happen last year, versus what actually happened in reality.

*Example:* The model assumed salaries would grow by 4%. But management authorized a massive 15% market-correction pay raise across the board. The model's baseline was wrong.
*Example:* The model assumed 5% of staff would quit. In reality, zero people quit.

If a company consistently generates massive "Experience Adjustment" losses year over year, it means the underlying actuarial assumptions are hopelessly detached from corporate reality and must be aggressively recalibrated.