What is an Underfunded Pension Plan?
For many decades, workers have relied on the security that they would retire with a reasonable pension, and that amount, usually paid on a monthly basis, was not subject to change. Companies made certain that money would exist to pay pensions, by fully funding their pension plans. A fully funded pension plan is one where the company has 100% of the money needed to cover current pensions and those that will be paid out in the future. As the economy took a downturn in the late 1990s, many companies sought to provide more spendable cash by creating an underfunded pension plan, where the money to cover all pensions owed currently, or in the future was not available. Essentially the liabilities of the underfunded pension plan exceeded its assets, changing the profile of the retiree significantly. For many people, this results in no surety that they will get the pension they were promised or for those who are retired, it may cause a significant drop in current pension distribution amounts. T
An underfunded pension plan can be defined as when a pension scheme’s assets are less than its liabilities. This means that the benefits received on reaching retirement age will be less than the amount of money paid into the pension scheme. Underfunded Pension Plans impose large risks on their beneficiaries who are exposed to massive losses when pension schemes are ended and schemes with the worst funding records are those most at risk. The government has estimated that during the last eight years, as many as 65,000 people have lost 20% or more of their expected company pension following the collapse of the companies which employ them.
