Pension Shortfall

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.

BREAKING DOWN '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. Unfunded Pension Plan

    An employer managed retirement plan that uses the employer's ...
  2. Pension Adjustment Reversal - PAR

    A numerical calculation in certain Canadian pension plans that ...
  3. Pensionable Service

    The period of service, expressed in a yearly figure, for which ...
  4. Advanced Funded Pension Plan

    A pension plan that is funded concurrently with the employee's ...
  5. Accumulated Benefit Obligation

    An approximate measure of a company's pension plan liability. ...
  6. Plan Participant

    A plan participant either contributes into a pension plan or ...
Related Articles
  1. Retirement

    Pension Plans: Pain Or Pleasure?

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

    A Primer On Defined-Benefit Pension Plans

    Most of us will rely on a pension plan in the future, so it's best to know the details of the various plans before signing up.
  3. Professionals

    Accounting For Long-Term Liabilities

    CFA Level 1 - Accounting For Long-Term Liabilities. Learn the components of various long-term liabilities and the rules governing their accounting treatments.
  4. Retirement

    7 Signs Your Pension Fund Is In Trouble

    Even if you're lucky enough to have a pension plan, you can't assume it'll pay out.
  5. Financial Advisors

    How to Advise Clients with Frozen Pensions

    Financial advisors are on the front line in advising clients impacted by a frozen pension. Here's what they need to consider.
  6. Financial Advisors

    New 401(k) Pension Rollover Rule: Pros and Cons

    Is the new rule allowing participants to roll their 401(k) balances into pensions a good idea?
  7. Term

    What are Pension Funds?

    A pension fund is a company-sponsored fund that provides income for employees in retirement.
  8. Retirement

    Understanding Defined Benefit Pension Plans

    An employer-sponsored retirement plan where employee benefits are based on a formula using factors such as salary history and duration of employment.
  9. Retirement

    How Safe Is Your Pension?

    A 2014 law permits some private pension plans to reduce benefits. How to figure out if your retirement income is endangered.
  10. Retirement

    How Pensions, Social Security Differ

    Both pensions and Social Security provide an income stream to retirees, but they differ widely on how they're structured and funded. Here's the lowdown.
RELATED FAQS
  1. Who bears the investment risk in 401(k) plans?

    Who actually bears the investment risk in a pension plan depends on the type of pension plan that is employed. In a broad ... Read Answer >>
  2. Are Canadian Pension Plans inflation-protected?

    Learn about the Canada Pension Plan and how it adjusts its contributions and benefits each year for changes in inflation ... Read Answer >>
  3. How do pay-as-you-go pension plans work?

    Learn what a pay-as-you-go pension plan is and how it is different from fully funded pension plans. Understand how public ... Read Answer >>
  4. What's the difference between a 401(k) and a pension plan?

    Discern the differences between 401(k) plans, in which employees assume the market risk, and pension plans, in which the ... Read Answer >>
  5. How does a pension income drawdown work?

    Understand what a pension income drawdown plan is, and learn the current rules governing pension income drawdown plans in ... Read Answer >>
  6. Can I leave my pension to my spouse when I pass away?

    In most cases, an individual with a pension plan should have the option to leave at least a portion of his or her pension ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center