Industry News

On October 6, 2021, the American Academy of Actuaries (AAA) released its issue brief, The 80% Pension Funding Myth. According to the brief, “Financial entities, regulatory bodies, governments and media have all cited an 80% funded ratio as a basis for whether a pension plan is “healthy” or “actuarially sound.” The frequency and persistence of these citations potentially lends credibility to a myth that an 80% “standard” is appropriate.” This brief is intended to debunk the myth that an 80% funded ratio is a basis for whether a pension plan is considered healthy or actuarially sound. 

The brief indicates that, “Pension plans are generally better evaluated on the strategy in place to attain a funded ratio of 100% within a reasonable period of time. The financial health of a pension plan depends on many factors in addition to funded status — including the size of any shortfall compared with the resources of the plan sponsor. Projections under a range of scenarios can be particularly useful in evaluating the plan’s expected funding trajectory and assessing plan health.” 

The brief concludes, “All plans should have a reasonable funding of contribution strategy to accumulate assets equal to 100% of a relevant pension obligation, unless reasons for a different target have been clearly identified and the consequences of that target are well understood.”

The brief is available here.