In defined benefit pension funding, what does solvency refer to?

• A. The scheme's ability to meet its long-term liabilities given current assets
• B. The current market value of assets
• C. The number of contributing members
• D. The regulatory compliance status

Answer: (A)

Solvency in defined benefit pension funding is about whether the scheme has enough resources to meet its long-term obligations to members. It compares the present value of the promised benefits (the liabilities) with the assets set aside to fund them. If the assets are sufficient under the actuarial assumptions used (discount rate, inflation, mortality, etc.), the fund is considered solvent and capable of paying future benefits. This concept isn’t just about how much assets the fund currently has (which can fluctuate with market values), nor about how many people contribute (which affects future contributions but not the fund’s ability to cover promised benefits), nor about regulatory status (which concerns compliance rather than solvency).