Plan Parameters

Current Plan Status
$
$
Rate Assumptions
%
%
Annual Cash Flows
$
$
$
Projection Settings
years
%
Key Formulas
Funded Ratio = Assets / PBO
Assets(t+1) = Assets(t) × (1 + ROA) + C - B
PBO(t+1) = PBO(t) + SC + IC - B
ROA = Return on Assets | C = Contributions | B = Benefits | SC = Service Cost | IC = Interest Cost
Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Funded Status

Current Surplus / Deficit -$20,000,000 Underfunded
Funded Ratio 80.0%
Required Contribution (Year 1) $24,400,000
Additional Beyond Planned (Year 1) $14,400,000
Year Reaching Target --
Funded Ratio at Horizon --

Required contribution is a single-year target calculation, separate from the multi-year projection below.

Funded Ratio Trajectory

Year-by-Year Projection

Year Plan Assets PBO Surplus / Deficit Funded Ratio

Year 1 Breakdown

Model Assumptions
  • Funded ratio shown is an accounting measure (Assets / PBO), not an ERISA regulatory funding percentage (AFTAP)
  • Returns are constant (expected ROA achieved every year)
  • Service cost, benefit payments, and contributions are constant annually
  • No actuarial gains/losses, plan amendments, or curtailments
  • PBO growth uses the discount rate as the interest cost rate
  • Interest cost accrues on beginning-of-year PBO; contributions and benefits at year-end
  • Does not model ERISA funding rules, PBGC premiums, or plan-specific regulatory requirements

For educational purposes. Not financial advice. Market conventions simplified.

Understanding Pension Funded Status

What is Pension Funded Status?

Pension funded status measures whether a defined benefit (DB) pension plan has sufficient assets to meet its projected benefit obligations. It is calculated as the difference between plan assets at market value and the projected benefit obligation (PBO). The funded ratio expresses this as a percentage: Assets / PBO.

Funded Status Equations
Surplus (Deficit) = Plan Assets - PBO
Funded Ratio = Plan Assets / PBO × 100%
Fully funded = 100% or above

How Plan Assets and PBO Evolve

Plan Assets

Grow by: Investment returns (Expected ROA), Employer contributions
Decrease by: Benefit payments to retirees

PBO (Liabilities)

Grow by: Service cost (new benefits earned), Interest cost (time value)
Decrease by: Benefit payments to retirees

The Discount Rate vs. Expected ROA

The discount rate (used to value PBO) is based on AA corporate bond yields. The expected ROA is the plan's anticipated investment return. When ROA exceeds the discount rate, assets tend to grow faster than liabilities, improving funded status over time. When ROA is below the discount rate, the ROA/discount-rate spread creates a headwind for funded status, though contributions and cash flow dynamics also matter.

Important: This calculator projects an accounting-based funded ratio (Assets / PBO), not an ERISA regulatory funding percentage (AFTAP). Actual pension management involves actuarial valuations, stochastic modeling, regulatory funding requirements, and PBGC considerations not captured here.

Required Contributions

The required total contribution is the amount needed in Year 1 to reach the target funded ratio by the end of that year. It accounts for expected asset growth (ROA), projected PBO growth (service cost + interest cost), and benefit payments. The formula is:

Required Total Contribution
Required = Target × PBO(t+1) - Assets(t) × (1+ROA) + Benefits
Additional = max(Required - Planned Contributions, 0)

Frequently Asked Questions

Pension funded status is the difference between a defined benefit plan's assets and its projected benefit obligation (PBO). A positive funded status (surplus) means the plan has more assets than liabilities, while a negative status (deficit) indicates underfunding. Funded status matters because it determines the plan sponsor's financial obligations, affects the company's balance sheet under accounting standards like ASC 715, and may trigger regulatory requirements for additional contributions under ERISA or equivalent local regulations.

The funded ratio is plan assets divided by PBO, expressed as a percentage. A plan is considered fully funded at 100% or above. The 80% threshold is often cited as a rule of thumb for significant underfunding. Note that US regulatory funding rules under ERISA use the Adjusted Funding Target Attainment Percentage (AFTAP), which is calculated differently from the accounting-based Assets/PBO ratio shown in this calculator. The AFTAP uses a funding-target liability (not PBO) and may include different asset smoothing. Plans falling below AFTAP thresholds face restrictions on benefit increases, lump-sum distributions, and plant shutdown benefits. Most pension actuaries recommend targeting funded ratios above 100% to provide a buffer against market volatility.

The projected benefit obligation (PBO) is the actuarial present value of all future pension benefit payments, including the effect of expected future salary increases. This distinguishes it from the accumulated benefit obligation (ABO), which uses current salary levels only. Each year, PBO grows by service cost (the present value of new benefits earned by active employees) and interest cost (the discount rate applied to beginning-of-year PBO, reflecting the time value of money). PBO decreases when benefit payments are made to retirees. The discount rate used to value PBO is typically based on AA-rated corporate bond yields matching the plan's liability duration.

The discount rate has an inverse relationship with PBO: a higher discount rate reduces the present value of future obligations, improving funded status, while a lower rate increases PBO and worsens funded status. For accounting measurement (ASC 715 / IAS 19), the discount rate is based on high-quality corporate bond yields matching the plan's liability duration; conventions vary by jurisdiction (e.g., AA-rated corporates in the US, government bond rates in some other countries). This sensitivity means falling interest rates can create pension funding crises even when asset returns are positive. For example, a 1% drop in discount rates can increase PBO by 10-15% for a plan with 10-15 year liability duration. This is why many pension funds implement liability-driven investing (LDI) strategies using long-duration bonds to hedge interest rate risk.

When a pension plan is underfunded, the plan sponsor may face several consequences: mandatory additional contributions under regulatory rules, restrictions on benefit improvements and lump-sum distributions, higher PBGC (Pension Benefit Guaranty Corporation) premiums in the US, negative impact on the company's balance sheet and credit rating, and potential plan freezing or termination in severe cases. In the US, these restrictions are triggered by the AFTAP (Adjusted Funding Target Attainment Percentage), which is a regulatory funding measure distinct from the accounting-based PBO ratio shown in this calculator. Sponsors typically develop multi-year contribution strategies to close funding gaps while balancing the impact on corporate cash flows.

Employer contributions directly increase plan assets, improving the funded ratio. Over time, the interaction between investment returns on assets, service cost and interest cost growth on PBO, and the level of contributions determines whether funded status improves or deteriorates. When the expected return on assets exceeds the discount rate and contributions cover the service cost gap, funded status tends to improve over time. The key insight is that even steady contributions may not close a deficit if the plan's expected return on assets is below the discount rate.
Disclaimer

This calculator is for educational purposes only and uses simplified actuarial assumptions. Actual pension management requires professional actuarial valuations, considers regulatory requirements (ERISA, PBGC), and models stochastic investment returns. This tool should not be used for actual pension funding decisions.

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Master portfolio theory and risk management from fundamentals to advanced analytics. Covers modern portfolio theory, risk metrics, performance evaluation, and factor models.

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