Blog: How does the policy funding ratio play a role in indexation?

28 January 2021 | Blog

The current funding ratio denotes the ratio between a pension fund’s commitments and assets at a given time. A current funding ratio of 100% implies that a pension fund has exactly enough assets to meet its commitments.
The policy funding ratio is the average of the current funding ratios over the past 12 months. The HPF must use the policy funding ratio for the decision to adjust pensions. The policy funding ratio determines whether we can raise the pensions with the rise of the consumer prices (indexation) or need to reduce them (cutback).

The current funding ratio looked like this in the 12 months to the end of September 2020:

Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20
102,6 104,7 107,3 102,6 96,3 91 91,6 92,6 92,8 91,6 94,3 94,5

The average of these was 96.8%. As you can see, the funding ratio can vary a lot from month to month. Pension funds use the policy funding ratio when making important decisions to avoid being dependent on coincidental circumstances.
An indexation may only be given if the policy funding ratio is at least 110%. If the policy funding ratio is between this lower limit of 110% and the upper limit of approx. 125%, indexation can only partially be granted. If the policy funding ratio is higher or equal to this upper limit, full indexation can take place. We expect that we will be able to partially increase your pension in the coming years. This mainly depends on the development of the interest rate and the stock market.

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