What is a funding ratio?
In its simplest form a funding ratio is the ratio of available assets to estimated liabilities. We use the funding ratio to monitor the long-term financial sustainability of our schemes. The assets are based on market value and the liabilities are estimated by actuarial valuation, which typically happens twice a year for the major icare schemes.
Liabilities vs assets
As an example, if you have $100 worth of liabilities and $125 worth of assets, then your funding ratio would be 125%.
$125 assets / $100 liabilities = 1.25 or 125%
The funding ratio fluctuates up and down as the value of the assets and liabilities move; increasing claims costs and decreasing asset values will negatively impact the ratio. Naturally, as asset values increase and claims costs decrease then the funding ratio would improve.
Volatility in funding ratio
This can occur from changes in accounting standards or practice, movements in global investment markets, legislative or regulatory changes that impact benefits or costs, long-term views on inflation, or overall investment expectations.
All of these can impact the estimated funding ratio and given the long-term nature of icare’s schemes, small changes can lead to large, prolonged impacts on the funding ratio.
What makes up the assets and liabilities?
Assets include things such as cash and investments. Investments could include shares, government bonds, property and infrastructure. These are held in the relevant scheme fund and invested in line with the investment strategy set by the icare Board for each scheme. All assets are valued in line with Australian Accounting Standards Board requirements.
Liabilities include items such as current and future scheme claims and operating costs; these are valued by actuaries who perform the biannual actuarial valuation. The actuaries appraise the schemes’ current and future liabilities using actual claims experience, economic and demographic assumptions, which then determine their estimated value. The assumptions are based on a mix of statistical studies and experienced judgment.
Both the asset and liability valuations are audited by the Audit Office of NSW annually.
You can read more about the current scheme valuations and funding ratios in our Annual Report, including investment portfolios, asset allocations and investment returns.