In 2018, our funded ratio increased by two percentage points to 96% on a smoothed basis, reflecting improvement for the sixth consecutive year. The improvement in the funded ratio in 2018 is attributable to the smoothing of strong investment gains from the prior years, together with member and employer contributions, partially offset by an increase in pension liabilities.
A goal of our Strategy is to be fully funded by 2025.
On a fair-value basis, the funded ratio declined by four percentage points from 101% to 97%, as the net return in 2018 was below the discount rate of 6%.
The discount rate is the interest rate used to determine the present value of pension benefit payments anticipated in the future, and minimum contribution rates. It has two parts: 1) the real discount rate before inflation, and 2) an assumption for inflation.
In our 2020 Strategy, OMERS set out an objective to reduce the Plan’s real discount rate from 4.25% to 4.0% by 2020, and continue to reduce it to 3.75% over time. Reducing the real discount rate mitigates the risk of future contribution rate increases and provides greater stability for future contribution rates and benefit levels.
We achieved the real discount rate target of 4.0% in 2017, three years ahead of schedule. At December 31, 2018, the real discount rate was unchanged at 4.0%.
The assumption for future inflation was 2.0% for both 2017 and 2018.
We will continue to decrease the real discount rate when investment results and liability experience are better than our long-term actuarial assumptions.