Virtually all investment funds share the ultimate goal of providing financial support for some class of beneficiaries. In the case of defined benefit (DB) plans, an underlying liability model reflects the flow of future payouts to retirees. For endowments, foundations, and defined contribution (DC) plans, the specifics of the underlying liability are less well defined, but a simplified deferred annuity model may be used as a baseline for measuring the plan's well-being.Once a model liability payment schedule is established, the liability value is defined as the sum of the present values of the future payments, discounted at a prescribed rate. The funding ratio (FR)-the ratio of the market value of the fund's assets to its liability-is the standard measure of a plan's future financial health.The FR has the virtue of being highly intuitive and seemingly easily understood. For example, FRs approaching 100% appear to suggest that a plan is "well funded," whereas lower FRs of, say, 60%-80% appear to suggest the need for significant new contributions and/or extraordinarily high investment returns. In fact, with low FRs, withdrawals to meet planned liability payments pull the FR downward unless there are unusually high compensating investment returns.One limitation of the FR is that it represents only a momentary snapshot of a plan's financial health and thus may turn out to be misleading as a long-term measure. To address this problem, we suggest that analysts incorporate two other measures-the coverage ratio (CR) and the funding gap (FG)-in order to gain a more detailed perspective on potential benefits from modest payment reductions and/or direct contributions. The CR is the ratio of the present value of all realized (and possibly reduced) liability payments to the initial liability. Higher returns lead to a monotonically increasing CR, even as the FR declines. Similarly, FG measures the dollar gap between the assets and the liabilities and may indicate a less dire funding situation than the late-stage FR.Even with a high initial funding ratio and seemingly reasonable return assumptions, the funding ratio's "orbit" may rise to a peak level, go into a "stall," and then fall precipitously. Although most of these issues are well understood by actuaries, they are often a source of confusion for other stakeholders.Virtually all investment plans share the ultimate goal of providing financial support for some class of beneficiaries. A plan's longterm financial health is typically measured by its funding ratio-the market value of assets divided by the present value of liability. Although this funding ratio is intuitively appealing, it may be misleading because it represents only a momentary snapshot of plan sustainability. Even with a high initial value and reasonable return assumption, the funding ratio's time-path (orbit) often shifts from a rise to a "stall" to a precipitous decline. In this article, we focus on how funding ratios evolve over time, using the concept of "fulfillment return" to clarify the limitations of t...
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