What Does a Pension Shortfall Mean for Your Retirement?

A pension shortfall could prove to be disastrous for your retirement if you are relying on a pension from your company. Here are the basics of a pension shortfall and what it could mean for your retirement.

Pension Shortfall

During a pension shortfall, the company that created the pension does not have enough money to meet the obligations of the pension fund. This typically happens because the investments that were selected by the pension manager did not live up to expectations. With a defined benefit plan, the company that starts the pension is responsible for paying the money that was guaranteed. Therefore, the employees are not taking any of the investment risk on themselves. The company is essentially saying that if an employee works for them for a certain amount of time, they will be able to get a specific amount of money upon retirement. If the money is not there when people are ready to retire, this is referred to as a pension shortfall. It can be a disastrous situation for the company and for the employees that are counting on that money.

Making up for It

Generally, a pension shortfall is discovered before the retirees are actually going to need the money. For example, they may be 5 to 10 years away from not having enough money for the people that are retiring. In this case, the company can usually make the necessary changes to catch the pension plan backup. One option that they have is to increase contributions to the pension plan. One notable case of this was when GM discovered that they were short on their pension plan. Because of that, they had to contribute a large portion of their profit to the pension plan until it was caught back up again.

Another way that the company can make up for a shortfall is by improving investment performance. While this can work on occasion, it is typically very unreliable. There is no way to predict whether the investment are going to perform better, so the most reliable route is to increase contributions.

Insurance

In some cases, the company is not able to make up for the shortfall out of their own money. When this happens, sometimes a pension insurance plan will step in and make up the difference. For example, there is a government-sponsored enterprise known as the Pension Benefit Guaranty Corporation. They insure more than 40 million pensions across the United States. If the company cannot continue to do business or they cannot afford the pension plan, the insurance company is going to step in and handle payouts. Throughout the life of the pension plan, the company has to pay a premium for each worker that is included in the plan. This guarantees the pension for those employees and makes sure that they are going to get something upon retirement. Sometimes pensions do not continue to exist because of a company bankruptcy. In that case, employees should help that they have insurance on the pension plan.



Pension Shortfall



A pension shortfall occurs when there is not a sufficient amount of money in the pension plan to cover the obligations to the employees of the company. When a defined benefit plan is set up, employees of a company are told that they will receive a specific amount of money for a fixed number of years of service. When employees reach the appropriate number of years, they are supposed to be able to get a fixed benefit. However, during a pension shortfall, there will not be enough money from the plan to pay for the retirement benefits of the employees.

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