Funding Ratio
The ratio of a pension plan's assets to its actuarial liabilities, expressed as a percentage.
In Detail
The funding ratio is the single most important indicator of a pension plan's financial health. It answers a straightforward question: for every dollar the plan has promised to pay in future benefits, how many cents does it actually have? A plan with $80 million in assets and $100 million in liabilities has an 80% funding ratio. Actuaries generally consider 80% the minimum threshold for a healthy plan, though 100% or above is the gold standard. Plans below 60% are in serious distress and may face benefit cuts, contribution increases, or intervention from regulators.
The funding ratio can change year to year based on investment returns, contribution levels, benefit payouts, and changes in actuarial assumptions like discount rates and mortality tables. In PensionWatch's Health Score, funding ratio accounts for 40% of the total grade because it is the most direct measure of whether a plan can meet its promises.
Frequently Asked Questions
What does Funding Ratio mean in pension finance?
The ratio of a pension plan's assets to its actuarial liabilities, expressed as a percentage.
Why does Funding Ratio matter for my retirement?
The funding ratio is the single most important indicator of a pension plan's financial health. It answers a straightforward question: for every dollar the plan has promised to pay in future benefits, how many cents does it actually have? A plan with $80 million in assets and $100 million in liabilit...