Characteristics of pension fund financial quality: the role of uncommitted funds

Abstract

We find empirical support that the availability of uncommitted funds (UCF), conditioned on the benefits to the insured, is a promising new measure of the financial quality of pension funds. Unlike funding ratios, UCF represent the surplus after fluctuation reserves for absorbing capital market risks are fully accumulated. Fund level data from Switzerland reveal that funds seem to be reluctant to build up UCF arbitrarily, but pass on part of it to the beneficiaries. This suggests that quality indicators such as UCF should not only be based on funding ratios, but incorporate the funds’ reserve and payout policy.