Pensions: funding ratio

The funding ratio reflects a pension fund’s current financial position, expressing the ratio between available assets and liabilities. In other words: it shows whether the pension fund holds enough reserves to pay out pension benefits – to its current and future members. The funding ratio is expressed as a percentage.

The funding ratio is calculated as follows: the value of a pension fund’s assets (the fund's investments in equity and bonds) is divided by the value of its liabilities (the current and future pension benefits to be paid out):

                          value of assets

 Funding ratio =  ──────────────────────────────  x 100%

                           value of liabilities

The current value of a pension fund's liabilities is calculated using the actuarial interest rate.

The funding ratio is subject to statutory rules. For example, pension funds are only allowed to apply partial or full index-linking if their funding ratio exceeds 110%. Index-linking means that a pension fund is able to increase pensions to reflect rising prices. If a pension fund's funding ratio is too low, it must take measures to improve its financial situation.

Funding ratio rules:

Funding ratio

A pension fund may decide to set higher contributions in order to improve its financial position. In extreme cases, a pension fund may have to decide to curtail pension benefits – not only for current pensioners, but also for members retiring in the future. This happens in the following two situations.

• A pension fund fails to meet the minimum own funds requirement for five consecutive years. In most cases, the minimum own funds requirement equals a funding ratio of 104%.
• The funding ratio drops below the critical lower limit. This limit is different for each pension fund.

The main purpose of these rules is to ensure that pension funds distribute their pension assets in a balanced way between current and future pensioners. In favourable times, they can all benefit from rising pension benefits. If a pension fund has deficits, they must also bear the consequences together. For example, pension benefits may have to be reduced. This is of course a drastic measure, but the alternative is that the pension fund would pay out too much now, leaving too little for future pensioners.

Many pension funds have had insufficient funding ratios for several years. This is partly due to falling interest rates, but that is not the only reason. Their choices relating to investments and contribution levels also play a role. Some pension funds have high funding ratios. Most of them collect higher contributions or have a different investment strategy.

According to the funding ratio rules, some pension funds would have had to curtail pension benefits. But the Dutch Minister of Social Affairs and Employment granted pension funds that would have had to curtail benefits based on the funding ratio at the end of 2019 or at the end of 2020 more time to improve their financial position – provided they had a funding ratio of at least 90%. As a consequence, most funds that are in trouble do not have to curtail pension benefits.

In the summer of 2019, the government, trade unions and employers’ associations agreed on a new pension system. By 1 January 2027 at the latest, employers, employees and pension providers must have adapted their pension schemes to the new system. The Minister has yet to decide on the funding ratio rules for the period up to 1 January 2027.

Do you want to know how your pension fund is doing? Then check the statistics section on our website. It lists the funding ratio of all pension funds, as well as information on pension funds’ investments and returns.