Declining funding ratios
D. Wenting
AFIR 2003
Funding levels
 1999
150%
 2000 140%
 2001 125%
 2002 105%
Instruments for steering
 Pension
plan
 Compensation for inflation
 Contributions
 Investment policy
Input for projection of funding,
situation end year 2000
 Funding
ratio 140
 Reduction (refund) on
contribution 40%
 Discount rate for the present
value liabilities 4%
 Nominal long term interest rate
5%
 Inflation rate 3%
 Equities in the asset mix: 40%
Projection of funding
in next 20 years
150%
240
140%
220
200
130%
180
160
120%
140
110%
100%
120
100
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
90%
16
17
18
19
20 80
60
number of years
funding level
target funding level
risk level
contribution level
Jacking up the funding from an actual 105% to
120%:
contributions 100% cost price
postpone inflation compensation
150%
240
220
140%
200
130%
180
160
120%
140
110%
100%
120
100
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
90%
16
17
18
19
20 80
60
number of years
funding level
target funding level
risk level
contribution level
After reaching the level of 120%,
funding is sinking back again
150%
240
140%
220
200
130%
180
160
120%
140
110%
100%
120
100
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
90%
16
17
18
19
20 80
60
number of years
funding level
target funding level
risk level
contribution level
Reasons funding is not holding
 Negative
real return on
investments
 Baby boomers
 Contribution is not high
enough to keep the surplus
relative in shape
How to maintain the level of 120%



Lower the target for indexation of the
liabilities from wage inflation to price
inflation (let us assume this makes a
difference of 1% indexation)
Add around 10% to the contribution level
for several years, to create an extra
surplus
Add some 1% yearly to the level of
contribution to keep up with future
demographical developments (baby
boomers)
Projections of future funding
from the level of 120% on
150%
240
220
140%
200
130%
180
160
120%
140
110%
100%
120
100
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
90%
16
17
18
19
20 80
60
number of years
funding level
target funding level
risk level
contribution level
Probabilities of under funding,
initional funding level 120%
course of probability of underfunding over time
probability underfunding
18,0%
16,0%
14,0%
12,0%
10,0%
8,0%
6,0%
4,0%
2,0%
0,0%
1
2
3
4
5
6
7
8
9
10
11
12
number of years
13
14
15
16
17
80% equities
60% equities
40% equities
20% equities
18
19
20
Alternative portfolios
bonds
bonds
credits
convertibles
high yield bonds
index linked bonds
equities
equities (public)
private equity
commodities
private property
public property
private property
Probabilities of under funding,
portfolio risk,
using alternative portfolios
table of average
average probabilities
probabilities ofofunderfunding
in in
1010
years
underfunding
years, for
for various portfolio
risks
and funding
ratio's
various
portfolio
risks and
funding ratio´s
initional funding ratio's
40,0%
probability of underfunding
funding 105%
110%
115%
120%
35,0%
probability
30,0%
7,0%
8,0%
25,0%
9,0%
20,0%
10,0%
11,0%
15,0%
12,0%
10,0%
13,0%
14,0%
5,0%
15,0%
0,0%
16,0%
7,0%
17,0%
19,7%
8,2%
2,9%
0,9%
funding 105%
22,8%
11,2%
4,9%
2,0%
funding 110%
25,3%
13,9%
7,1%
3,4%
27,5%
16,5%
9,3% funding
5,0%
115%
29,3%
18,8%
11,5%
6,8%
30,9%
20,8%
13,5%
8,5% funding 120%
32,3%
22,7%
15,5%
10,3%
33,4%
24,3%
17,2%
12,0%
34,5%
25,8%
18,9%
13,7%
35,4%
27,1%
20,4%
15,2%
8,0% 9,0% 10,0% 11,0% 12,0% 13,0% 14,0% 15,0% 16,0% 17,0%
36,2%
28,3%
21,4%
16,7%
portfolio risk