actuarial cost (funding) methods (PUC, entry age normal)
/ PUC = "P-U-C"; EAN = "E-A-N" /
If a pension's total cost is a big lump that will be paid out over a worker's whole career and retirement, someone has to decide how to spread that cost across the years of work. Should each year carry an equal share? Should later years (with higher salaries) carry more? Actuarial cost methods are the agreed recipes for slicing the total promised cost into a yearly normal cost and a past-service accrued liability.
Two methods dominate. Projected unit credit (PUC) treats each year of service as earning one 'unit' of pension, projected to the salary expected at retirement; the normal cost is the value of the unit earned this year, and the accrued liability is the value of all units earned so far. It tends to produce a normal cost that rises as a member ages. Entry age normal (EAN) instead spreads the cost as a level amount (or level percentage of pay) over the member's entire career from the age they joined; this gives a smoother, more stable contribution but assigns more to the early years, building a larger accrued liability sooner. The two methods value the same ultimate promise but split it between past and future differently, so they report different accrued liabilities and yearly costs.
The choice of method matters because it shapes the contribution pattern and the reported funded status — accounting standards and funding regulators often mandate which method to use (PUC is required under many accounting standards like IAS 19). The honest caveat: no cost method changes the total amount that must ultimately be paid; it only changes the timing of when costs are recognised. Comparing two plans' liabilities is meaningless unless you know they used the same method and assumptions.
Take one member promised a final-salary pension. Under PUC, the yearly normal cost starts low and climbs as she ages and her salary grows. Under EAN, the actuary computes a level percentage of pay that, contributed every year from her hire age, exactly funds the pension — so the cost looks flat and the accrued liability builds up faster early on. Same pension, same total, different yearly shape.
PUC: rising yearly cost. EAN: level cost over the career. Same total, different timing.
A funding method never changes how much must ultimately be paid — only when cost is recognised. Two plans' accrued liabilities are not comparable unless they share both the method and the assumptions.