Free funds in a pension fund are surplus funds that are not directly needed to cover obligations to insured persons. They arise when a pension fund has accumulated assets in excess of the required provisions. This means that the pot for covering pension assets must first be filled, as must the pot for the value fluctuation reserve. Once these are full, the rest of the money becomes free funds.
How free funds arise: Good investment results: When the pension fund achieves higher returns than necessary with its investments.
Not to be confused with:
- Coverage ratio: Ratio of available assets to liabilities. A coverage ratio above 100% may indicate that free funds are available.
- Employer contribution reserve: A separate account into which an employer can make voluntary payments to finance future contributions. This does not count as free funds.
The distribution and use of free funds is usually decided by the pension fund's board of trustees and is subject to legal provisions.