Understanding the Projected Unit Credit Method

If you have ever read a PAS 19 actuarial valuation report, the Projected Unit Credit method is the engine behind the numbers. It is the required approach for measuring retirement obligations under Philippine and international accounting standards. Here is what it actually does.

What it is

The Projected Unit Credit (PUC) method, sometimes called the accrued benefit method pro-rated on service, is the standard actuarial cost method for valuing the obligations and expense of a defined benefit retirement plan. It treats each year of service as an additional unit of benefit, and measures each unit separately to build up the total obligation.

How it works

For each employee, the method projects the benefit they will have earned up to the valuation date using a consistent formula, then discounts it back to present value. Two sets of assumptions drive the result:

• Demographic assumptions: employee turnover, mortality, and disability, which affect who will actually reach retirement.
• Financial assumptions: future salary increases, which grow the projected benefit, and the discount rate, which brings it back to today's value.

Because retirement is usually years away, the discount rate is central. It converts a future promise into the present-value figures that appear on the balance sheet.

What it produces

Under PAS 19 (the local equivalent of IAS 19), the PUC method produces two headline numbers: the Defined Benefit Obligation, the present value of benefits earned for service to date, and the Current Service Cost, the value of the additional benefit earned in the current period. It is also used to measure the effect of plan amendments or a significant reduction in headcount. See our PAS 19 valuation guide for how these feed into your financial statements.