Pension Shortfall

AAA

DEFINITION of 'Pension Shortfall'

A situation in which a company offering employees a defined benefit plan does not have enough money set aside to meet the pension obligations to employees who will be retired in the future.

INVESTOPEDIA EXPLAINS 'Pension Shortfall'

With a defined benefit plan, the employer bears the risk of the investments in the plan. Therefore, when investments such as stocks perform poorly, a shortfall occurs, meaning there isn't enough money in the pension plan to meet the needs of people about to retire. A company can rectify a pension shortfall by increasing investment returns (usually an unlikely course of occurrence) or putting aside more money into the pension plan, thereby reducing the company's net income.

As an example, in August 2002, UBS Warburg reported that General Motors had a pension shortfall of $22.2 billion, equal to 83% of the company's market value. This means that $4 of the first $5 that GM earns per share each year stands to get eaten up by pension obligations.

RELATED TERMS
  1. Welfare And Pension Plans Disclosure ...

    A late-1950s law that gave the U.S. Department of Labor regulatory ...
  2. Unemployment Compensation Amendment ...

    A law in the United States that allows a terminated employee ...
  3. Ontario Teachers' Pension Plan ...

    An organization that oversees the pension plan for public school ...
  4. Corridor Rule

    In financial accounting, the corridor rule is a materiality rule ...
  5. Actuarial Basis Of Accounting

    A method used in computing the periodic payments that a company ...
  6. Cash Balance Pension Plan

    A pension plan under which an employer credits a participant's ...
RELATED FAQS
  1. Should I purchase a master limited partnership (MLP) in my retirement account?

    Most investors should not purchase units in a master limited partnership, or MLP, in their retirement accounts. MLPs offer ... Read Full Answer >>
  2. How should I invest the money I keep on my IRA?

    For individuals who are just starting to save, certificates of deposit can be a good place to start, but the interest rates ... Read Full Answer >>
  3. Why choosing the right investment adviser is crucial for your portfolio's health

    Just as finding a good mechanic will help keep your car running smoothly, finding a good broker or financial advisor can ... Read Full Answer >>
  4. What documents I need to transfer an IRA/SEP/SIMPLE to a Traditional IRA?

    Most firms require that you complete their account transfer request form, which they use to request the transfer of assets ... Read Full Answer >>
  5. Is there a limit on how much I can move from my IRA to my Roth IRA?

    There is no limit on the amount that can be converted from your Traditional IRA to your Roth IRA. To learn more, read Retirement ... Read Full Answer >>
  6. How do the C-suite members work together to make a successful company?

    Corporate managers, typically chosen by a board of directors in large organizations, are ultimately responsible to stakeholders ... Read Full Answer >>
Related Articles
  1. Retirement

    Pension Plans: Pain Or Pleasure?

    Employees have a love/hate relationship with this retirement option.
  2. Savings

    Retire In Style

    Set your sights on the golden years and get there sooner.
  3. Personal Finance

    Top 8 Ways Companies Cook The Books

    Find out more about the fraudulent accounting methods some companies use to fool investors.
  4. Retirement

    The Investing Risk Of Underfunded Pension Plans

    Determine the risk to a company's EPS and financial condition resulting from an underfunded pension plan.
  5. Investing

    How To Evaluate Pension Risk By Analyzing Annual Costs

    Learn how to assess whether a company's pension plan is posing more risks than what the footnotes indicate.
  6. Personal Finance

    Should You Track The Cost Of Retirement Income?

    Today, workers face a challenge when saving for retirement, because retirement income is getting more expensive, and the savings are not keeping up.
  7. Retirement

    How Much Money Do You Need To Retire In Hawaii?

    The Aloha State remains an idyllic place to retire, but at what cost? From rent to cereal to gasoline, we look at the hidden costs of living in paradise.
  8. Personal Finance

    Why Do Employers Have To Fill Out The I-9 Form?

    With all the employment opportunities in the U.S. attracting people from around the world, the I-9 form establishes who is eligible to work here.
  9. Personal Finance

    Employer? Steps To Fill Out Immigration's I-9 Form

    Step-by-step, here's how you and the employee you've hired fill out this required form from the U.S. Citizenship and Immigration Services.
  10. Personal Finance

    A Guide to Financial Education for Doctors

    Doctors need to choose the educational option which best fits his or her time, schedule and learning preference. Here's a guide.

You May Also Like

Hot Definitions
  1. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  3. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  4. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  5. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center