What is the return requirement for a fully funded pension plan?

For a fully funded pension plan, the return requirement aligns with the discount rate used to calculate the present value of the plan's liabilities. This is essential because the discount rate reflects the yield or return needed to meet the future obligations of the pension plan, ensuring that the assets can cover the promised benefits when they come due.

The discount rate is determined based on the characteristics of the liabilities, such as their timing and risk profile, and typically corresponds to the expected investment returns on the plan’s assets. By matching the return requirement with the discount rate, the pension plan can ensure that it is on track to fulfill its obligations without incurring a funding shortfall.

In a practical sense, if the return achieved by the pension investments falls short of this rate, it may lead to underfunding, which could mean the plan does not have enough resources to pay out the required benefits to retirees. Thus, managing the asset allocation and investment strategy to meet or exceed the discount rate is critical for the plan's financial health.