EXPLAINER: What is a Funded Ratio in the Context of Defined Benefit Plans?
Posted on 05/22/2020
What is a Funded Ratio in the Context of Defined Benefit Plans?
The funded ratio is the ratio of assets to accrued liability: Assets / AAL = Funded Ratio.
Funded ratios are reported based on the actuarial value of assets (AVA or smoothed value) and market value of assets (MVA). Generally, the closer the funded ratio is to 100%, the more secure the current accrued benefits. However, if a plan is currently underfunded, the attempt to achieve a funded ratio of 100% will impact the other policy goals, intergenerational equity, and the desire for a stable contribution from one year to another.
The actuarial value of assets (AVA) is the value of assets used for the actuarial valuation. The AVA can be either the market value (MVA) or a smoothed value of assets.