DEFINITION of Funded Status
Funded status compares the assets to the liabilities in a pension plan. This data point is useful in understanding how many employees are truly covered in a worst-case scenario if the company or other organization is forced to pay all of its retirement benefits at once.
BREAKING DOWN Funded Status
The equation to determine a plan’s funded status is:
Funded Status = Plan Assets - Projected Benefit Obligation (PBO)
Future liabilities, or benefit obligations, are what the plan owes employees for service. Plan assets, which are usually managed by an investment team, are used to pay for retiree benefits. Funded statuses can range from fully funded to unfunded. For example, in 2017, California State Teachers’ Retirement System (CalSTRS) announced an increase in its unfunded pension liability to $97 billion for the fiscal year ended June 30.
An analyst can calculate a company's funded status using figures in the pension footnote. This is in the company's financial statements. Some have proposed that companies move their pension deficits or surpluses onto the balance sheet, rather than just show them in the footnotes. Moving the funded status of pension plans, as well as other retirement benefit obligations like health-care plans, onto the balance sheet could force many companies to recognize this potentially large liability.
Funded Status and Pension Plan Types
There are two main types of pension plans: a defined-benefit plan (DB) and defined-contribution plan (DC). In June 2017, U.S. assets in corporate DB plans assets rose by 0.55% (or $18.4 billion) to hit $3.362 trillion in the quarter ended March 31, according to a Federal Reserve report. At the same time, U.S. corporate DC plan assets increased 3.9% or $227.3 billion over the same time period to hit $5.982 trillion.
In a DB plan, the employer guarantees that the employee receives a definite amount of benefit upon retirement, regardless of the performance of the underlying investment pool. The employer is liable for a specific flow of pension payments to the retiree (the dollar amount is determined by a formula, usually based on earnings and years of service).
In a defined-contribution plan, the employer makes specific plan contributions for the worker, usually matching to varying degrees the contributions that employees make. The final benefit that the employee receives depends on the plan's investment performance. A DC plan is less expensive for a company than the traditional pension, when the company is on the hook for whatever the fund can't generate. The best-known defined-contribution plan is the 401(k), and its equivalent for non-profits' workers, the 403(b).