Pension Shortfall
You run a pension plan for The National Chainsaw Juggler's Union. Your accountants believe that, based on the number of current members you have and their projected retirement needs (and massive long-term chainsaw-related medical bills they'll likely have, even in retirement), you need to have $2 billion in your fund. You currently have $200 million.
Uh-oh. Major pension shortfall.
The term refers to a circumstance when a pension plan doesn't have enough money to meet its eventual obligations. Basically, the employer or union (or whoever has sponsored the plan) has promised certain benefits in retirement, but doesn't have enough cash to deliver.
Shortfalls like this are a particular danger of defined pension plans. Usually, the culprit for the shortfall comes from weak investment performance. Due to the long-term nature of pension planning, funds rely on growth over time to build up enough money to cover benefits. Employees and the employer contribute to the fund, but much of the cash needed to pay for retirement expenses comes from investment gains. If those underperform, it can contribute to a pension shortfall.
Related or Semi-related Video
Finance: What is a Pension?31 Views
finance a la shmoop. what is a pension? well it rhymes with tension, and likely
for good reason. if you're a teachers pension or a fireman's pension or [person wearing dark glasses writes something down]
another state employees pension that's backed up by a state that's going
bankrupt. Hi, California, Hi Illinois. well we're looking at you. all right people
well a pension is another term for a retirement fund. but what's special about
a pension is that the employer essentially forces you to put away money
for your retirement and then they invested for you.
how nice. or at least be sure you invest it well on a salary of 75 grand a state [gambling table shown]
employed ditch-digger might get a contribution of say 10 grand a year into
her pension, and that's each year 10 grand of forced savings for as long as
she you know digs ditches for the state. and in some states where the unions are
strong in the governing financial knowledge is weak the government
guarantees a minimum financial return on the pension investment made on behalf of
the employees. that is in California for example the state guarantees a 10% per
year return on their invested pension savings. if the invested return like [equation]
investing it in Wall Street and stocks and bonds and private equity funds and
all that stuff well if that invested return is less than that number less
than that 10%, then the state rights to the pinch and a check to cover the
incremental difference. yeah it's a huge Delta and it's well pretty much why you
a Californian Illinois you're going bankrupt remember. Jesus Saves
but Moses invests. [ Moses, holding stone tablets glares and demands interest]
Up Next
What are pension liabilities? Pension liability is the difference in what an entity owes in pension payments versus how much they have on hand to c...
What are Unfunded Pension Liabilities? Companies with pension plans are obligated to set aside contributions into a separate fund in order to isola...
What is Pension Benefit Guaranty Corporation? Created in 1974, the Pension Benefit Guaranty Corporation (PBGC) is a branch of the Dept. of Labor re...