Funding Ratio Peaks and Stalls

Martin L. Leibowitz, Stanley Kogelman and Anthony Bova

Financial Analysts Journal, 2017, vol. 73, issue 3, 8-20

Abstract: Virtually all investment plans share the ultimate goal of providing financial support for some class of beneficiaries. A plan’s long-term financial health is typically measured by its funding ratio—the market value of assets divided by the present value of liability. Although this funding ratio is intuitively appealing, it may be misleading because it represents only a momentary snapshot of plan sustainability. Even with a high initial value and reasonable return assumption, the funding ratio’s time-path (orbit) often shifts from a rise to a “stall” to a precipitous decline. In this article, we focus on how funding ratios evolve over time, using the concept of “fulfillment return” to clarify the limitations of the single-point funding ratio measure. Disclosure:The authors report no conflicts of interest. Editor’s NoteSubmitted 9 December 2016 Accepted 9 March 2017 by Stephen J. Brown

Date: 2017
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DOI: 10.2469/faj.v73.n3.7

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