What Is the Funding Target Attainment Percentage (FTAP)?

The Funding Target Attainment Percentage (FTAP) is a measure used to assess the financial health of defined benefit pension plans. It represents the ratio of a plan’s assets to its funding target — the amount needed to meet the plan’s promised future benefits. Expressed as a percentage, FTAP is a key indicator of whether a pension plan is adequately funded under the rules of the Pension Protection Act of 2006 (PPA).

FTAP helps plan sponsors, participants, regulators, and other stakeholders understand the current status of a pension plan’s funding and whether corrective actions are needed. If the percentage is too low, it signals underfunding, which can lead to benefit restrictions or required additional contributions from the sponsoring employer.

How FTAP Is Calculated

FTAP is calculated using the following formula:

FTAP = Plan Assets ÷ Funding Target

• Plan Assets refer to the actuarial value of the assets held in the plan, which may be smoothed over a period to reduce volatility.
• Funding Target is the present value of all accrued benefits owed to plan participants as of the valuation date. This includes benefits for current employees, retirees, and beneficiaries.

The result is a percentage that shows how much of the plan’s funding target is currently covered by its assets. For example, an FTAP of 90% means the plan has assets sufficient to cover 90% of its obligations.

Purpose and Significance Under the PPA

The FTAP concept was introduced with the Pension Protection Act of 2006, a major legislative effort aimed at strengthening the funding of private-sector defined benefit pension plans. Before the PPA, plans could remain significantly underfunded without triggering major consequences. The PPA imposed stricter funding requirements and established clear benchmarks, with FTAP serving as a central figure.

FTAP plays a critical role in determining:

• Benefit Restrictions: If a plan’s FTAP falls below certain thresholds, restrictions on benefit increases, lump sum distributions, and plan amendments may apply. For instance, plans with an FTAP under 80% may face limits on paying out lump sums.
• Funding Requirements: A low FTAP may require the plan sponsor to make additional contributions to bring the plan closer to full funding.
• Plan Status Disclosure: FTAP must be disclosed to plan participants in the annual funding notice, which provides transparency about the plan’s financial condition.

FTAP Thresholds and Their Implications

There are key FTAP benchmarks that can trigger specific actions or limitations:

• 100% FTAP: A plan that is fully funded, meaning its assets match or exceed the present value of all promised benefits.
• 80% FTAP: This is a critical threshold. Falling below it typically results in restrictions on certain benefit payments, particularly lump sum distributions and other accelerated benefit forms.
• 60% FTAP: Plans below this level face even stricter limitations and are considered at serious risk of default without corrective funding.

These thresholds are designed to protect participants and ensure plan sponsors take timely action to restore funding.

Role in Pension Plan Management

FTAP is more than a compliance figure; it’s an ongoing management tool for plan sponsors and fiduciaries. Monitoring FTAP over time can help identify trends in plan health and the effectiveness of funding strategies. A declining FTAP might indicate the need for more conservative investment choices, increased contributions, or plan design changes.

From a financial reporting and planning standpoint, FTAP is often reviewed alongside other metrics, such as the plan’s funded ratio based on market values or its actuarial funded status under accounting standards like ASC 715. However, FTAP specifically reflects funding status under ERISA and the PPA and is used for regulatory and legal compliance purposes.

Limitations and Considerations

FTAP is a valuable metric, but it has limitations. It uses actuarial assumptions, including discount rates and mortality tables, that can significantly influence the funding target. Small changes in these assumptions can lead to large swings in FTAP.

In addition, FTAP calculations can differ slightly depending on whether they are done on a valuation basis (used internally for funding decisions) or a notice basis (used for participant disclosures). This can sometimes cause confusion if different numbers are reported in different contexts.

It’s also worth noting that FTAP does not reflect projected future contributions or investment returns. It’s a snapshot as of a specific valuation date, not a forward-looking indicator.

The Bottom Line

The Funding Target Attainment Percentage is a critical gauge of the funding status of defined benefit pension plans, introduced under the Pension Protection Act of 2006 to ensure that promises made to employees are backed by adequate assets. By comparing a plan’s assets to its funding target, FTAP determines whether the plan is compliant, at risk, or significantly underfunded. The percentage influences benefit restrictions, contribution requirements, and public disclosures. While it's a powerful tool for assessing plan health, it must be interpreted carefully, considering its assumptions and context. For plan sponsors, regular monitoring of FTAP is essential to avoid regulatory penalties and ensure long-term retirement security for participants.