If you’re new to the world of actuarial science or just curious about what goes on behind the scenes in insurance and pension planning, understanding actuarial assumptions is a great place to start. These assumptions are the backbone of how actuaries estimate future financial obligations, helping companies and organizations plan wisely for what’s ahead. Think of them as carefully educated guesses—based on data, experience, and sound judgment—that help predict things like how long people will live, how investments will perform, or when employees might retire.

At their core, actuarial assumptions fall into two main groups: demographic assumptions and economic assumptions. Each plays a distinct role in calculating the costs and risks associated with pensions, insurance policies, and other financial products.

Let’s break down what each type means and why they’re so important.

Demographic assumptions focus on the human element—basically, the characteristics and behaviors of people covered by a plan. This includes estimates of mortality (how long people are expected to live), retirement rates (when employees might leave the workforce), disability rates, turnover (how many employees might leave a job before retirement), and even marriage rates when benefits depend on spouses. For example, an actuary might use a mortality table like the RP-2014 combined with future improvement scales to estimate life expectancy more accurately. These assumptions help predict the timing and amount of benefit payments that a pension plan will have to make in the future[1][4].

On the other hand, economic assumptions deal with money and markets. They include estimates of investment returns (how well plan assets will grow), inflation (how prices and costs rise over time), salary growth (how employees’ pay might increase), and payroll growth. For example, an actuary might assume a 7% annual investment return on a diversified portfolio or project a 3% salary increase each year. These assumptions impact how much money needs to be set aside today to meet future obligations[1][3][4].

Choosing the right assumptions isn’t just guesswork—it’s a careful, ongoing process governed by professional standards to ensure they’re realistic and unbiased. Actuaries follow guidelines such as ASOP No. 35 for demographic assumptions and ASOP No. 27 for economic assumptions to maintain consistency and quality[1][2].

So, why do these assumptions matter so much? Because even small changes can have big effects. For example, lowering the assumed investment return from 7.5% to 7.0% can increase the amount a pension plan needs to contribute today to stay funded. That’s exactly what happened in Washington State recently, where the Pension Funding Council lowered economic assumptions to reflect a more cautious outlook on future returns and salary growth[3].

Here’s a practical example to bring this to life. Imagine you’re part of a company’s pension plan. If the actuary assumes people will retire earlier than they actually do, the plan might overestimate how soon it has to pay benefits, potentially setting aside more money than needed. Conversely, if the investment return assumption is too optimistic, the plan could end up short on funds because the actual returns don’t meet expectations. That’s why actuaries regularly review and update their assumptions based on the latest experience and economic trends[1][4].

For beginners wanting to get hands-on, here are some actionable tips:

• Understand your data: Assumptions should be grounded in the specific experience of the group you’re analyzing. For instance, if your company has younger employees who tend to switch jobs frequently, turnover assumptions should reflect that.

• Stay current: Economic conditions change, so assumptions about inflation or investment returns need to be updated periodically.

• Compare with industry benchmarks: Look at standard mortality tables or salary growth rates used in your industry to see if your assumptions are reasonable.

• Document your assumptions clearly: Transparency is key, especially when sharing results with stakeholders who may not have an actuarial background.

• Use sensitivity testing: Check how your results change if you tweak assumptions slightly. This helps understand the range of possible outcomes and prepares you for uncertainties.

A few interesting facts highlight the impact of actuarial assumptions:

• According to industry studies, changing the discount rate (used to calculate present value of future liabilities) by just 0.25% can change pension liabilities by several percentage points, affecting funding needs significantly[4][7].

• Mortality improvements—people living longer than expected—have been one of the biggest challenges in pension planning over recent decades, requiring actuaries to update mortality tables regularly.

• Inflation assumptions affect cost-of-living adjustments for pensions, which can have a compounding effect on long-term liabilities[4].

In essence, actuarial assumptions are like the foundation of a well-built financial structure. Without solid assumptions, the calculations for pensions and insurance could be way off, leading to underfunded plans or unexpected costs. For anyone stepping into actuarial work or managing pension funds, getting comfortable with these assumptions—and knowing how to choose and adjust them—is crucial.

Whether you’re an aspiring actuary, a finance professional, or just someone interested in how these complex financial predictions are made, starting with a clear understanding of demographic and economic assumptions gives you a strong base. Keep in mind that actuarial assumptions are not static—they evolve with new data, changing economic conditions, and improved methodologies. Staying curious and up to date will help you navigate this fascinating and important part of financial planning.