Funded Ratio

How It Works

The funded ratio is the most-watched metric for pension plan health and is calculated as actuarial value of assets (AVA) divided by actuarial accrued liability (AAL), expressed as a percentage. A ratio of 100% means the plan is fully funded: assets are sufficient to pay all promised benefits if all actuarial assumptions hold. The Government Finance Officers Association (GFOA) and the Society of Actuaries consider plans below 80% to be at elevated risk, and plans below 60% to be severely underfunded with significant risk of benefit cuts or insolvency. The aggregate funded ratio for U.S. state and local pension plans stood near 103% in 2000 before the dot-com crash, fell to roughly 62% after the 2008 financial crisis, and has hovered between 70-80% since then depending on market conditions, per Public Plans Database aggregate data. Wide dispersion exists: South Dakota Retirement System, Wisconsin Retirement System, and the New York State Common Retirement Fund all exceed 95% funded, while Kentucky Retirement Systems' Non-Hazardous plan sits near 16% funded, one of the worst-funded major U.S. public plans. New Jersey's state pension has funded ratios below 50%. Chicago Municipal (22%), Chicago Police (24%), and Dallas Police & Fire (49% in 2016, which triggered the 2017 reform) are notable underfunded urban plans. The ratio depends heavily on actuarial assumptions (discount rate, investment return, life expectancy, salary growth), so moving from a 7.5% to 6.8% discount rate (as CalPERS did between 2017 and 2021) can lower a reported funded ratio by 10+ percentage points without any change in underlying economics. Funded ratio is the primary input to the 20% pension funding factor in the CitySpend Fiscal Health Score.

Related Terms

• Unfunded Liability, The difference between a pension plan's projected liabilities (what it owes to current and future retirees) and its current assets. Also called the unfunded actuarial accrued liability (UAAL).
• Defined Benefit Pension, A retirement plan where the employer guarantees a specific monthly payment for life based on years of service and final salary, the traditional government pension.
• Actuarial Assumption, The financial and demographic projections used to calculate pension costs and liabilities, including expected investment returns, employee life expectancy, and salary growth.
• Discount Rate (Pension), The interest rate used to calculate the present value of future pension liabilities. A lower discount rate produces higher liabilities; a higher rate produces lower liabilities.