The 80% benchmark funding ratio of pension plans should not be used as the sole basis to judge whether a pension plan is financially sound, according to an issue brief from the American Academy of Actuaries.
The brief, “The 80% Pension Funding Standard Myth,” states that multiple pension funding ratios over several years need to be examined to gain an accurate picture of the financial and actuarial soundness of a plan, along with the size of the projected benefit obligation compared to the plan sponsor's financial resources, the plan sponsor's financial health, the funding or contribution policy of the plan, and the plan's investment strategy and risk level.
The ratio — calculated as a plan's fair value of plan assets divided by its PBO — was identified in a 2007 Government Accountability Office report as a de facto standard, according to the issue brief.
“The 80% myth can lead to a dangerous slippery slope,” said Don Fuerst, senior pension fellow, in a news release. “It could evolve into an inadequate target if not challenged. Pension plans should have a strategy in place to attain or maintain a funded status of 100% or greater over a reasonable period of time.”
Mr. Fuerst was unavailable for comment.
The brief is available from the academy's website.