how well a pension plan is funded is determined by calculating the plan s funding ratio the funding ratio is the result of dividing the total assets in a plan by the amount of benefits that are due to be paid out a pension plan that has a funding ratio of less than 100 means that it doesn t have enough funds to cover future liabilities or monthly benefits a pension that s overfunded would have a funding ratio of more than 100 percent 
however just because a funding ratio is below 100 doesn t necessarily mean the pension is in trouble or in danger of not fulfilling its financial commitments typically a pension that has a funding ratio of 80 or more is considered stable these plans enjoyed surpluses during the dot com bubble and the years preceding the great recession but failed to benefit from the bull market of the past decade most pension funds are technically underfunded in 2022 the average funding ratio was 77 8 1 in 2023 the average funding ratio was 78 1 2benefits of an overfunded pension planthe funding level of a pension plan is an indication of the health of the plan and the likelihood that the company will be able to pay the monthly retirement benefits when employees retire if the pension plan is more than 100 funded it s an overfunded plan and that s a good thing for beneficiaries it means the company has already saved more than enough money to pay projected retirement benefits for current workers and retirees with excess funds the pension plan can have greater flexibility in its investment strategy it may have the opportunity to invest in a broader range of assets or pursue higher return investments potentially increasing overall returns knowing that the pension plan is well funded can boost employee morale and confidence in the organization employees may feel more secure about their retirement benefits contributing to a positive workplace atmosphere in a very indirect way you may be able to make the case that prospective employees or applicants are more likely to be willing to join the company as opposed to knowing the company s pension plan is underfunded limitations and downsides to overfundedexcessive funding in a pension plan can lead to unfavorable tax consequences for organizations when a pension plan is significantly overfunded there may be limitations on the deductibility of contributions affecting the tax benefits associated with pension funding overfunded pension plans may sometimes draw regulatory scrutiny particularly if there are suspicions of mismanagement or improper use of surplus funds regulatory bodies may choose to more closely monitor overfunded pension funds to ensure compliance with laws and regulations organizations must always adhere to reporting requirements accurately and maintain transparency in fund management these requirements may be slightly heightened to show any surplus is being handled according to regulatory standards there s also a psychological risk with overfunded plans and employee expectations the awareness of a significant surplus in a pension plan can raise employee expectations for increased benefits or additional perks managing these expectations is crucial to prevent dissatisfaction among employees as they may question why benefits can t be higher 