Understanding the Funding Ratio of a Defined Benefit Plan

While traditional pensions are on the decline as more employers opt to offer defined contribution plans to employees, they haven’t disappeared entirely. If you have clients who anticipate receiving a pension in retirement, it’s important to understand where those benefits might fit in. Funding ratio is a key consideration when evaluating the financial health of defined benefit plans.

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What Is Funding Ratio and How to Calculate It?

A funding ratio or funded ratio measures the value of a pension plan’s assets divided by its liabilities. This ratio is not fixed as the value of assets within the plan and its associated liabilities can fluctuate over time. A commonly used rule of thumb for what’s considered to be a “good” funding ratio is 80%, though many defined benefit plans fail to meet that standard.

Here’s a sampling of funding ratios for state and local pensions as of 2025, with both the highest and lowest-ranked states included. The figures below come from Equable’s 2025 State of Pensions report.¹

District of Columbia: 117%
Wisconsin: 106.2%
Washington: 103.2%
New York: 93.7%
Florida: 86%
Texas: 82.5%
New Hampshire: 74.2%
Mississippi: 59%
Illinois: 54%

As you can see, there are significant differences in assets and liabilities across plans. As to why the numbers span such a broad range, differences may be attributed to several variables. Those include each state’s economy and the size of its public workforce; the amount of debt the plan carries; and how the plan invests funds.

These figures represent the statewide level of funding but it’s important to note that there can be variations across government plans within the same state. A pension fund for one county may be fully funded at 100% while employees of a county in another part of the state may have a plan that’s 70% funded. The same degree of variance can exist among corporate pension plans or federally sponsored plans, such as the basic benefit plan, which is offered to federal employees.

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Importance of Funding Ratio for Financial Advisors

There’s a simple reason why advisors may concern themselves with funding ratios when managing client portfolios that include pension plan benefits. The funding ratio tells you how financially healthy a pension plan is at any given time.

Here’s a guideline to help you interpret defined benefit plan funding ratios.

Funding Ratio	What It Means
Over 100%	A defined benefit plan is overfunded if its funding ratio exceeds 100%. The plan holds more assets than it needs to cover its obligations, which can signal strong financial health.
100%	Plans that have a 100% funding ratio are considered fully funded. This type of plan has all the funds it needs to pay out pension benefits and cover its other obligations, with no surplus left over.
Under 100%	When the funding ratio is below 100%, the plan is underfunded and lacks sufficient assets to meet all future payout obligations. If a ratio is consistently below 80%, employers may have to contribute more to make up the difference. For perspective, the average national funding ratio was 82.5% in 2025, suggesting many plans are underfunded.

Knowing how much your client can expect to collect in pension plan benefits matters when developing their financial strategy up to retirement and beyond. Pension plans can be terminated if there’s not enough money to pay out benefits. If there’s even a remote possibility that your client might face the loss of some of their expected pension benefits, that’s something you’d need to consider when determining how much they need to save toward retirement and where to contribute those funds.

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Limitations of Funding Ratio

The primary limitation of using a funding ratio to measure the financial health of a pension plan is that it can change over time. Markets are not static; pension plan investments can gain value or lose value, depending on market conditions. That can directly affect funding ratio calculations. The same is true if a plan increases or decreases its liabilities.

For that reason, advisors may use other factors to evaluate the health of a client’s defined benefit plan. Those factors can include:

The size of the company, relative to the size of the funding gap
How the plan’s contribution policy is structured and how closely the policy is followed
The plan’s preferred investment strategy and its overall performance to date

It’s also helpful to look at the financial health of the plan sponsor. A company that has steady cash flow and low debt levels, for instance, may be in a much stronger position to meet any pension plan shortfalls than a company that has substantial liabilities or inconsistent cash flow, regardless of its size.

Calculating Individual Funding Ratios for Clients

While most discussions of funding ratio center on pension plans, there’s another way to interpret it. Advisors may use a “personal funding ratio” to evaluate the health of their clients’ portfolios.

In this sense, the funding ratio refers to the difference between a client’s assets and their anticipated spending needs in retirement. For example, a client who has $2 million in assets and expects to spend $1.5 million in retirement has a funding ratio of 133%, which suggests that they’re well prepared financially.

A client who has $500,000 in assets and expects to spend the same $1.5 million in retirement, on the other hand, has a funding ratio of 33%. In other words, they’re only a third of the way to their goal with regard to saving and investing.

Walking clients through this calculation can give them perspective on where they are and what steps they may need to take to get aligned with their long-term retirement target. The closer someone is to retirement, the more accurate this calculation tends to be, though it may still have value for your client at any stage of their investing life cycle.

You may routinely recalculate client funding ratios annually or when a major life change occurs that may lead to a change in their retirement savings needs. It may also be helpful to use portfolio visualizer tools to run different scenarios showing how much a client’s funding ratio may change based on specific investment decisions.

Frequently Asked Questions

How Do You Calculate Funding Ratio?

The funding ratio calculation is a simple one. Add up all assets and divide them by total liabilities, then multiply by 100%. In the context of measuring a pension plan’s financial health, a funding ratio of 100% indicates that the plan is fully funded. A ratio above that amount indicates that it’s overfunded, while a ratio below 100% means it’s underfunded.

Can an Employer Cancel a Pension Plan?

Employers can terminate a pension plan at any time, which may occur if the plan’s funding ratio is insufficient to allow it to pay out employee benefits. Should an employer cancel a pension plan due to underfunding, a federal agency called the Pension Benefit Guaranty Corporation (PBGC) can step in to ensure that employees can receive benefits up to certain limits.

How to Find the Funding Ratio for a Pension Plan?

To find the funding ratio for a pension plan, you’ll need to know the plan’s assets and liabilities. Advisors can find this information on Form 5500, Annual Report/Return of an Employee Benefit. The IRS requires pension plans that file this form to make the filing public, including plan assets and liabilities. Only one-participant plans and foreign plans are excluded from having this information published online.

Bottom Line

A financial advisor examining how a plan’s funding ratio could impact her client's retirement.

Pension plans can provide your clients with a steady stream of retirement income, assuming the plan is funded well enough to pay expected benefits. Talking to clients about their plan’s funding ratio and how it may affect retirement can help you evaluate whether they’re on track with their goals.

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Article Sources

All articles are reviewed and updated by SmartAsset’s fact-checkers for accuracy. Visit our Editorial Policy for more details on our overall journalistic standards.

The State of Pensions 2025 | January Update. Equable, Jan. 2026, https://equable.org/wp-content/uploads/2026/01/State-of-Pensions-2025_January-Update_Final.pdf.