What is funding ratio?

"Funding ratio" is the ratio between the assets (the available resources) of a pension fund (such as investments) and the pension obligations the fund has towards all participants (the present value of the amount to be paid out to them).

The funding ratio gives an indication of the solvency position of a pension fund and is therefore also called the "pension thermometer". A funding ratio of 105% means, for example, that 105 euros are available for every 100 euros of pension obligations.

The funding ratio is a crucial measure for determining whether a pension fund is able to pay both current and future pension benefits. The interest rate plays an important role in this; the higher the interest rate, the lower the present value of the obligations and the higher the funding ratio.

There are different types of funding ratios, such as the actual funding ratio, policy funding ratio, economic funding ratio, nominal funding ratio, and real funding ratio, each contributing in its own way to insight into the financial health of a pension fund.