Reading a Pension Annual Report: Is It Underfunded?

An underfunded pension does not have enough assets to pay its future benefits. This is often the case in rough economic times. U.S. pension funds might be underfunded by $350 billion dollars cumulatively.

Getting the Plan’s Annual Report

You should make sure that your pension is properly funded. You can request a copy of your pension plan’s most recent annual report summary from your Human Resources Department. Alternatively, you can request this information from your union’s pension benefits office. You can also look up this information on your plan’s IRS form 5500.

Every pension administrator in the United States must file this form. This form gives detailed financial information about your plan. You can obtain this form by contacting FreeErisa. Pension administrators must also give you “summary plan descriptions” on your particular benefits.

How to Know if Your Plan Is Underfunded

In order to find out whether your plan is underfunded, look at the ‘“funding ratio” section of your plan’s annual report. This figure is a ratio of assets to liabilities. For example, stocks and securities that the pension holds or money that the pension is obligated to pay out to retired employees. If the funding ration is above 100, the plan is over-funded. If the funding ratio is below 100, the plan is underfunded. The higher the ratio, the better funded the plan is.

Consequences of an Underfunded Pension

An underfunded pension should not be ignored. If a company’s pension is underfunded, the company must revise its cash flow plans and reduce non investment related spending. If the shortfall is not reduced quickly, the company must pay higher PBGC premiums. This further disrupts cash flow to the company. Furthermore, companies are required to inform its employees if its pension plan becomes underfunded. This piques the attention investors, vendors, lenders, and rating agencies, which may put the company in further financial trouble.

What You Can Do if Your Plan Is Underfunded

An underfunded pension does not necessarily mean that you will not get the benefits you have earned. Public sector pensions are fairly safe because the government can increase taxes to cover the shortfall. However, If your plan’s funding ratio is well below 100, you might want to do something about the situation. You can join with other employees that the pension is covering and demand changes to the plan. Contact the plan administrator and any union representatives you might have.

Plan administrators are obligated to hear and answer your questions. Unfortunately, you probably would not be able to opt of your plan even if it is in trouble. However, your pension is partially protected by the U.S. Department of Labor, under the Employee Retirement Income Security Act. An insolvent plan is partially protected under the Pension Benefit Guaranty Corporation. If a company has an underfunded pension, it can make later payments to catch up with the necessary funding levels. This process is called making accelerated payments with “deficit reduction contributions’” (DRCs).

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