The Tool Desk
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First identify the plan and the measurement basis
Before interpreting any number, establish four facts from the statement or accompanying actuarial report:
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- Plan type: A defined-benefit (DB) plan promises a formula-based benefit and reports an actuarial liability. A defined-contribution (DC) plan records individual account balances; there is generally no fund-wide promise to pay a specified amount, so a DB funding ratio is not the right test.
- Country and rules: IAS 26-style financial statements, U.S. ERISA funding notices, UK DB funding valuations and Dutch funding-ratio disclosures use related ideas but different definitions and assumptions.
- Valuation date: Assets and liabilities may be measured on different dates in summaries, and market levels can change materially between them.
- Liability basis: Accounting, technical-provisions, low-dependency and buy-out values answer different questions. Never compare ratios until the basis is the same.
For a DB plan, the central question is whether the assets available to the plan are sufficient, on the selected basis, to meet promised benefits as they fall due. That is a solvency and cash-flow question, not simply an investment-performance ranking.
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Read the statement of net assets first
The statement of net assets available for benefits is the balance-sheet starting point. IAS 26 calls for disclosure of the assets held for benefits, the valuation bases used, significant or employer investments and liabilities other than the promised benefits. Read every line and its note rather than relying on a headline total.
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What each asset line tells you
| Statement item | What to check | Why it matters |
|---|---|---|
| Equities | Quoted or private, geographic exposure, sector concentration and valuation method | Public prices are frequent; private holdings may rely on appraisals or models and can lag market moves. |
| Government and corporate bonds | Credit quality, maturity, duration, yield basis and whether values are fair value or amortised cost | Duration and credit risk determine how the portfolio responds to interest-rate and spread changes. |
| Property and infrastructure | Independent valuation date, leverage, liquidity and tenant or project concentration | Reported values may adjust less often than market assets, while selling can take months. |
| Derivatives and pooled funds | Gross and net exposure, collateral, counterparty and look-through holdings | A small balance-sheet line can create a much larger economic exposure. |
| Cash and short-term assets | Unrestricted cash, expected benefit payments and operating needs | Liquidity supports payments without forced sales. |
| Employer or sponsor investments | Amount, restrictions and concentration relative to total assets | The employer may already be the source of the plan’s covenant; holding more of its securities can compound that risk. |
| Other assets | Receivables, contributions due, insurance contracts and amounts recoverable | An amount shown as an asset may depend on the sponsor paying it or on a contract being enforceable. |
Confirm whether “market value,” “fair value,” “actuarial value” or another basis is used. Market or fair value can rise or fall even when the fund still owns exactly the same securities. A note explaining pricing hierarchy, model inputs or delayed property valuations is part of the risk assessment, not accounting decoration.
Do not overlook liabilities other than benefits
Administrative payables, taxes, investment-management fees due, borrowing, derivative collateral and other obligations reduce the amount available for benefits. A fund can show substantial investments while having less net assets available than the gross asset total suggests. Reconcile the statement’s “net assets available for benefits” to the asset schedule and identify every deduction.
Use the changes statement to explain the movement
The changes statement explains why the opening asset balance became the closing balance. Build a bridge using the same categories shown in the accounts:
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- Add employer contributions. Separate regular contributions from deficit-repair or one-time payments and note whether amounts were received by the reporting date.
- Add employee contributions. For a DB plan these may be part of the financing arrangement; for a DC plan they are credited to members’ accounts.
- Add investment income. Interest, dividends, rents and other recurring income should be shown separately from changes in market value when the statement permits.
- Add realised and unrealised gains or losses. A market gain is not a cash contribution. A loss can occur without a security being sold.
- Subtract benefits paid. Include pensions, lump sums, transfers and refunds, and distinguish regular payments from bulk settlements.
- Subtract administration, investment expenses and taxes. Determine whether investment returns are reported before or after these costs.
- Account for transfers and other movements. Mergers, member transfers, insurance transactions or currency changes can alter the balance without representing investment skill.
- Reconcile to closing net assets. If the bridge does not tie, investigate a classification change, foreign-exchange movement, accounting-policy change or error before drawing conclusions.
This bridge answers a practical question that the closing balance cannot: did assets grow because contributions exceeded benefits, because markets rose, or because both happened? A plan whose assets increased only through a temporary contribution may have a different risk profile from one whose increase came from sustainable cash flow and returns.
Find the promised-benefit liability
For a DB plan, look for wording such as “actuarial present value of promised benefits,” “defined-benefit obligation,” “technical provisions” or “pension liability.” The liability is a present value: an estimate today of future benefit payments, not an invoice due immediately.
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Read the assumptions beside the number
| Assumption or feature | Question to ask | Effect on the reported liability |
|---|---|---|
| Valuation date | When were the cash flows and market inputs measured? | A different date can change discount rates, inflation expectations and asset values. |
| Discount or actuarial interest rate | Is the rate linked to high-quality bonds, expected asset returns, a prescribed technical rate or another basis? | Lower discount rates generally increase the present value of long-dated benefits; higher rates generally reduce it, all else equal. |
| Inflation | Are benefits indexed, and is salary or price inflation included? | Higher assumed inflation raises benefits that are linked to pay or prices. |
| Salary growth | Does the promise depend on final or career-average salary? | Higher future pay assumptions can increase accrued or projected benefits where the rules permit. |
| Longevity | Which mortality table, improvement scale and future-life assumptions are used? | Longer expected lifetimes increase the period over which pensions are paid. |
| Vesting and benefit rules | Are benefits vested, conditional, indexed, capped or subject to early-retirement options? | Eligibility and option assumptions alter both amount and timing of payments. |
| Membership data | How many active, deferred and pensioner members are included? | A mature population has nearer-term cash needs and less time to recover from losses. |
Compare the current assumptions with the prior valuation. A liability increase may reflect weaker investment conditions, a lower discount rate, an assumption change, benefit accrual or demographic experience rather than a sudden deterioration in the fund’s administration.
Understand sensitivity, not just the central estimate
Look for sensitivity to a one-percentage-point change in discount rate or inflation, a longevity improvement, and other material variables. The sensitivity does not predict the next result; it shows how exposed the promise is to plausible changes. A plan with a large liability duration can see its funded percentage move sharply when long-term rates move even if its asset holdings are unchanged.
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The basic calculation is:
Funded percentage = plan assets ÷ plan liabilities × 100
The U.S. Department of Labor model notice states: “The funded percentage is calculated by dividing Plan assets by Plan liabilities.” That arithmetic is simple; the difficult part is deciding which assets and liabilities are being used.
| Basis | Question it is intended to answer | What can make it differ |
|---|---|---|
| Accounting | What liability and asset values should appear in financial reporting under the applicable standard? | Prescribed discounting, recognition and presentation rules. |
| Technical provisions | Does the plan meet the funding basis used for ongoing regulatory contributions? | Regulatory assumptions, recovery plans and scheme-specific methods. |
| Low-dependency | Could the plan be supported with little reliance on the employer? | More conservative investment and discount assumptions than an ongoing basis. |
| Buy-out | What assets would be needed to secure benefits with an insurer? | Insurer pricing, expenses, margins, guarantees and prevailing market conditions. |
Always write the ratio with its date and basis, for example “108% on the 31 December 2025 technical-provisions basis,” rather than “the fund is 108% funded.” Do not compare a technical-provisions ratio for one year with a buy-out ratio for another and call it a trend.
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As a UK market snapshot, The Pensions Regulator estimated at 31 December 2025 that about 90% of schemes were in surplus on technical provisions, 80% on a low-dependency basis and 60% on a buy-out basis; aggregate technical-provisions funding was estimated at 124%. These are estimates for that date and population, not a conclusion about an individual scheme. The gaps between bases demonstrate why the label matters.
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Interpret investment returns in context
A one-year return answers only how the assets performed over that interval. It does not show whether the return kept pace with the liabilities, whether contributions or benefit payments drove the asset change, or whether fees consumed much of the gain.
Check the return definition
| Return detail | What to verify | Common misreading |
|---|---|---|
| Gross or net | Are management fees, custody, performance fees and transaction costs deducted? | Comparing a gross fund return with a net benchmark exaggerates the apparent result. |
| Time-weighted or money-weighted | Does the method remove the effect of external cash flows, or reflect the investor’s actual timing? | A large contribution before a rally can make a money-weighted result differ from the manager’s time-weighted result. |
| Nominal or real | Is inflation deducted? | A positive nominal return can still lose purchasing power. |
| Benchmark | Is the benchmark stated, investable and consistent with the actual asset allocation? | A return cannot be judged against an unrelated market index. |
| Period | Is it one year, since inception or a rolling multi-year period? | A single exceptional year can hide a weak compounded record. |
Use geometric averaging for multi-year performance because it reflects compounding. UK guidance recommends reviewing at least five years where that history is available. For annual returns r1 through rn, the annualised geometric return is ((1+r1)(1+r2)…(1+rn))^(1/n) − 1. A simple arithmetic average is not a substitute when gains and losses compound.
Match returns to the liability
Compare the asset return with the change in the liability value and with the plan’s benefit cash flows. A bond-heavy portfolio may produce a modest asset return while protecting the funded ratio when discount rates fall, whereas an equity-heavy portfolio may earn more over a long period but create a large short-term deficit. Report whether the fund uses interest-rate or inflation hedging and how much of the liability exposure that hedge covers.
Test cash-flow resilience and downside risk
Investment strategy must fit the timing of payments. A mature, cash-flow-negative plan pays more in benefits and expenses than it receives in contributions. If it lacks liquid assets, it may have to sell property or growth assets after a market fall. That forced sale can lock in losses even when the long-run expected return remains attractive.
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Questions to ask about liquidity
- What are the expected benefit and expense payments for the next one, three and five years?
- Which assets can be sold quickly without a material discount?
- Are private-market commitments, collateral calls or borrowing facilities included in the cash forecast?
- Does the plan hold enough cash and high-quality bonds for stressed outflows?
- Could a large employer contribution or transfer be delayed?
Questions to ask about resilience
- Does the actuarial report show the effect of a fall in equities, a rise or fall in interest rates, higher inflation and longer life expectancy?
- How much of the liability’s interest-rate and inflation sensitivity is hedged?
- Is the employer covenant assessed, including profitability, leverage, access to finance and concentration of the sponsor’s own securities in the plan?
- What recovery or contingency actions are available if the funded percentage falls?
Stress results are scenarios, not forecasts. Their value is in showing whether the plan has time, liquidity and sponsor support to absorb an adverse movement without missing benefits.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Compare two funds or two years without creating a false trend
- Align the valuation date. If dates differ, explain the market period between them.
- Align the liability basis. Compare accounting with accounting, technical provisions with technical provisions, and so on.
- Compare assumptions. Record discount rate, inflation, longevity, salary growth and benefit rules for each period.
- Compare asset composition. Note allocation, concentration, leverage, currency exposure and hedging.
- Compare return definitions. Use the same gross or net treatment, benchmark and performance method.
- Separate cash flows from performance. Identify contributions, benefit outflows, transfers and expenses before attributing a balance change to investments.
- Check accounting changes. Explain restatements, reclassifications or a change in policy before interpreting a movement.
- Compare liquidity and sponsor support. Two funds with identical ratios may have very different ability to pay benefits through a market shock.
A comparison table should therefore show the ratio, basis, date, assumptions, asset mix, net return history, cash-flow position and stress information side by side. If a value is not disclosed, record it as “not stated” rather than inferring it from another number.
Worked example: why the label changes the conclusion
The following figures are illustrative, not a valuation of any particular plan. Suppose a statement reports assets of £102 million at 31 December. The actuarial report gives a technical-provisions liability of £95 million and a buy-out liability of £120 million.
- Technical-provisions funding:
£102m ÷ £95m = 107.4%. - Buy-out funding:
£102m ÷ £120m = 85.0%.
Both calculations are correct. The first indicates a surplus on the ongoing technical basis; the second indicates that the assets would not currently purchase equivalent insurer cover on the stated buy-out basis. Neither ratio says whether the plan has enough liquid assets for next year’s payments or whether the employer covenant is strong. Those questions require the cash-flow forecast, asset liquidity and sponsor assessment.
Now suppose long-term discount rates fall and the liability rises to £105 million while assets remain £102 million. The technical-provisions ratio becomes 97.1% even though no security was sold and no investment transaction occurred. The change reflects the sensitivity of the present value to the valuation assumptions.
Jurisdiction and accounting differences to keep in view
IAS 26-style reporting
IAS 26 focuses on a statement of net assets available for benefits, the changes in those net assets, and disclosures about valuation bases, significant investments, employer investments and other liabilities. It does not turn every plan statement into one universally comparable funding ratio; the liability information and presentation depend on the plan and applicable reporting framework.
U.S. ERISA funding notices
A U.S. DB plan’s annual funding notice uses the plan’s defined statutory assets and liabilities for the required funded percentage. Read the notice’s valuation date, interest-rate and mortality assumptions, benefit restrictions and any explanation of endangered or critical status. Do not substitute an accounting balance-sheet liability for the statutory measure.
UK DB funding measures
UK schemes commonly present technical-provisions, low-dependency and buy-out measures. Regulatory funding, long-term objective and insurer pricing are distinct questions, so a surplus on one basis does not remove the need to examine the others.
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Dutch and other national disclosures
Some jurisdictions publish a funding ratio based on prescribed discount curves, recovery rules or policy reserves. The name “funding ratio” does not guarantee identical mathematics. Record the local definition before comparing it with a ratio from another country.
A practical reading checklist
- Identify plan type, country, accounting standard, valuation date and liability basis.
- Reconcile gross assets to net assets available for benefits.
- List asset classes, valuation methods, concentration and employer investments.
- Read every liability assumption: discount rate, inflation, salary, longevity, vesting and benefit options.
- Calculate assets divided by liabilities and write the basis and date beside the percentage.
- Bridge opening to closing assets through contributions, income, gains, benefits, expenses, taxes and transfers.
- Use net, compounded returns over several years and name the benchmark and method.
- Compare asset returns with liability sensitivity, hedging and benefit cash flows.
- Check near-term liquidity, forced-selling risk, stress tests and employer covenant.
- Investigate restatements or changed assumptions before calling a movement an improvement or deterioration.
The most defensible conclusion is therefore conditional: a fund is better placed when its assets cover liabilities on the relevant basis, its cash flows remain manageable, its return history is adequate after costs and its strategy is resilient to adverse rates, inflation, markets and longevity. The statement supplies the evidence, but the basis and timing determine what that evidence actually means.
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