A pension fund must be able to cover its obligations at all times. A simple key figure indicates whether it is able to do this: the coverage ratio. It shows the ratio between the value of the assets and the liabilities of a pension fund.
The ratio is formed between
- the value of the pension assets of all insured persons (i.e. how many invested assets does the fund have?) and
- and the amount required by the fund for its future payments to actively insured persons and pensioners.
For example, a coverage ratio of 105% has a value fluctuation reserve of 5%. If it is below 100%, there is a so-called shortfall. In this case, the pension fund does not have enough money to cover all current and future obligations with assets.
The level of the coverage ratio depends on the so-called technical interest rate applied by the pension fund. The technical interest rate is purely a calculation factor. This means that the payments due in the future are discounted to the present date. A reduction in the technical interest rate therefore leads to a lower coverage ratio.
When comparing two pension funds with comparable coverage ratios, the one that applies the lower technical interest rate is therefore better. As a rule of thumb, a 0.5% difference in the technical interest rate equates to a 5% difference in the coverage ratio. The best pension funds have a coverage ratio of 115 to 120% with a 2% technical interest rate.
If you would like to know more, you can read more about the different types oflanguage or read the article on the“pension language“.
Last update: 17.09.2024 08:35
