Implications of early funding ratio failure for benefit payment ability

Determine whether, under USS’s self-sufficiency run-off simulations for a bond-heavy self-sufficiency portfolio, paths that remain below the 90% funding ratio threshold at year three are indeed unable to pay all promised pensions as they fall due, and characterize conditions under which early funding ratio failure implies eventual capital exhaustion.

Background

The paper examines USS’s 2018 stochastic simulations and highlights that most paths failing the 90% funding ratio test at year three nonetheless go on to pay all benefits, suggesting the funding ratio condition may not be predictive of capital exhaustion or benefit payment failure.

Clarifying whether early failure of the funding ratio condition implies eventual inability to pay benefits is important for validating the funding ratio’s use within USS’s self-sufficiency framework and for understanding its role in inflating liabilities and driving gilt-yield dependence.