Maarten Niederer, Senior Consultant Investment Performance, wrote an article about Funding/Solvency Ratio Attribution. The Journal of Performance Measurement published the article in its Winter edition.
The introduction of the article says:
The funding ratio is a key measure used by Pension Funds all over the world, and has a counterpart in the insurance world as the solvency ratio. This article gives a practical overview of how to explain the changes in this ratio over time. Within the article, we will use the terminology “funding ratio,” but the methodological framework outlined can also be applied to the solvency ratio.
Both ratios will indicate the value of assets currently owned relative to the future liabilities that need to be funded by those assets. For the purposes of the ratio, future liabilities are discounted to their present value. However, it is uncertain whether the assets will meet the expected return implied by the discount rate. As these ratios indicate the likelihood that future liabilities can indeed be met, they are key health indicators for life insurers (solvency ratio) and defined benefit pension schemes (funding ratio).
In the article, we will first give a high-level overview of the suggested methodology, followed by its application to a specific illustrative case. We will explore how the methodology may be applied under different conditions, and conclude with a discussion on applicability. In the appendix, a more detailed description of the methodology is given.
Download full article (pdf 11 pages)