A pension fund’s capacity to absorb risks without lowering nominal pension entitlements depends on various factors. The first is the capital buffer, which pension funds can draw on before a shortfall arises. This buffer is essential for being largely certain of meeting nominal pension promises and has proven its usefulness during the financial crisis. At end-June 2011 the average funding ratio of the total pension sector was 111%. This corresponds to a capital buffer of 11%, signifying that the buffers for the sector as a whole are not yet back at the desired level.
The second relevant factor is the effectiveness of the contribution rate as a steering instrument. This indicates the degree to which a pension fund can correct its course by adjusting pension contributions. For a young pension fund with many active members and few pensioners, the effectiveness of this instrument is strong and so the fund can absorb more severe shocks by levying a temporary recovery contribution. For the pension sector as a whole, the effectiveness of this instrument is limited. An average fund  can no longer quickly recover from a moderate shock of 5% of the technical provisions by adjusting the contribution rate; in that case, a recovery contribution of 9% of pensionable earnings would be required for three years.
The chart below presents, for a large number of pension funds, the effectiveness of the contribution instrument and the funding ratio. It reveals large differences in the resilience of pension funds. Funds at the bottom-left of the chart are vulnerable and have a funding shortfall while the effectiveness of the contribution instrument is relatively weak. They can neither use capital buffers nor an increase in contributions to absorb new shocks. Funds in that quadrant are therefore in a difficult position and that may prompt another close look at the financial structure or consultations with social partners on the pension scheme that is to be carried out.
Chart 1: Funding ratio and effectiveness of the contribution rate as a steering instrument