How Do I Know If My Pension is Underfunded? Tips to Check Your Retirement Plan

Have you ever wondered if your pension is underfunded? It’s a question that many people don’t think to ask until it’s too late. Retirement planning can be overwhelming, and understanding your pension can be particularly daunting. In this article, we’ll explore how to know if your pension is underfunded and what that might mean for your retirement.

To start, it’s important to understand what a pension is and how it works. A pension is a retirement savings plan that provides a guaranteed monthly income for life after you retire. The amount you receive is based on a formula that takes into account your years of service, salary, and other factors. If your pension is underfunded, it means that the plan doesn’t have enough money to pay all of the promised benefits. This can happen for a variety of reasons, including poor investment returns, inadequate contributions from employers or employees, or unexpected changes in demographics.

Unfortunately, if your pension is underfunded, it can have significant consequences for your retirement. You may receive less money than you expected, or your employer may have to cut benefits to keep the plan afloat. This can create a lot of stress and uncertainty at a time when you should be enjoying your golden years. That’s why it’s important to monitor your pension and take action if you suspect that it’s underfunded. In this article, we’ll show you how to do this and provide some tips for protecting your retirement income.

Understanding Pension Funding Levels

When it comes to understanding pension funding levels, it’s important to know that pensions are typically funded by contributions from the employer and the employee. These contributions are invested, and the investment returns are used to fund pension benefits. Pension funding levels are determined by how much money is in the pension fund compared to how much money is needed to pay out future benefits.

Here are some important things to know when it comes to understanding pension funding levels:

  • Pension funding levels are typically expressed as a percentage.
  • A pension fund that is 100% funded has enough assets to pay for all of its expected future benefit payments.
  • A pension fund that is underfunded has less than the required amount of assets to pay for all of its expected future benefit payments.

It’s important to note that pension funding levels can fluctuate over time, depending on investment returns and changes in the number of retirees and active employees. A pension fund may be fully funded one year, but the next year it may become underfunded if investment returns are lower than expected or if the number of retirees increases.

Pension Fund Accounting Processes

Pension funds are required to strictly adhere to accounting processes to keep track of their assets, liabilities, and financial transactions. These processes ensure that funds are managed effectively and that the pension plan can meet its obligations to pay benefits in the future.

  • Valuation: Pension funds are required to conduct annual valuations of their assets and liabilities to accurately determine their funding status. This involves reviewing investment gains or losses and adjusting the plan’s assumptions regarding future returns, interest rates, and mortality rates.
  • Actuarial Assumptions: Pension funds must make assumptions about the future based on a range of factors such as life expectancy, inflation rates, and investment performance. These assumptions need to be regularly reviewed and updated to ensure they accurately reflect current economic conditions and demographic trends.
  • Financial Reporting: Pension funds are required to produce regular financial reports that disclose their funding status, investment performance, and significant events that affect the plan. These reports must comply with relevant accounting standards and provide transparency to plan participants and other stakeholders.

Additionally, pension funds may choose to hire external accounting firms to provide independent audits of their financial statements. This can provide additional assurance of the accuracy and completeness of the accounting processes and financial reporting.

Overall, the accounting processes used by pension funds are critical to ensuring the long-term financial sustainability of the plan and the security of retirement benefits for plan participants.


Understanding the accounting processes involved in pension fund management is essential for anyone with a stake in the plan’s financial health. By knowing how pension funds value their assets and liabilities, make actuarial assumptions, and produce financial reports, plan participants can be more informed and better able to advocate for their retirement security.

Term Definition
Valuation Annual review of assets and liabilities to determine funding status
Actuarial Assumptions Pension fund assumptions about future economic and demographic trends
Financial Reporting Regular reporting of financial status and investment performance

With these processes in place, pension funds can ensure they are meeting their obligations to pay benefits to retirees and keep the plan financially healthy for years to come.

Factors that affect pension funding

Understanding the factors that affect pension funding is essential for any individual who receives a pension or is planning to receive one in the future. Pension funding refers to the process of ensuring there are sufficient funds to fulfill the obligations of a pension plan. Here are some factors that can affect pension funding:

  • The type of pension plan: There are different types of pension plans, such as defined benefit plans, defined contribution plans, and hybrid plans. The funding requirements, investment strategies, and risk management techniques will vary for each type of pension plan.
  • The size of the pension plan: Larger pension plans typically have more resources to fund their obligations. They can invest in a broader range of assets, negotiate better deals with investment managers, and spread the costs of administration and compliance over a larger participant base.
  • The demographics of the plan participants: The age, salary levels, retirement age, and life expectancy of the plan participants can influence the funding obligations and investment policies of a pension plan. For example, if a pension plan has a higher percentage of older participants, it may need to allocate more resources to conservative investments to ensure it can meet its obligations.

Funding levels

One way to assess the health of a pension plan is to look at its funding level. The funding level is the ratio of the plan’s assets to its liabilities. A funding level of 100% means that the plan has sufficient assets to cover all its obligations. A funding level of less than 100% means that the plan is underfunded, and may need to take steps to increase its assets or reduce its liabilities.

Here is an example of how to calculate the funding level:

Plan assets $100 million
Plan liabilities $120 million
Funding level 83%

In this example, the plan has assets of $100 million and liabilities of $120 million, so the funding level is 83%. This means the plan is underfunded by $20 million and may need to take steps to improve its funding level.

It’s important to note that funding levels can fluctuate over time, depending on a variety of factors, such as investment performance, changes in the demographics of the plan participants, and changes in the interest rates used to calculate plan liabilities.

Identifying warning signs of underfunded pensions

If you’re nearing retirement age, one of your primary concerns might be about whether or not your pension is underfunded. Here are some common warning signs to watch out for:

  • Lowered interest rates: When the Federal Reserve lowers interest rates, it poses a significant problem for pensions as they need high yields to grow and stay afloat.
  • Shrinking contribution rates: If the company is paying fewer contributions to the pension fund, the fund’s assets will decrease, which can lead to underfunding.
  • Inadequate investment returns: If the pension fund’s investments aren’t generating sufficient returns or if they’re losing money due to poor investment decisions, it can cause the pension to become underfunded.

However, if you don’t have access to the details of your pension fund’s assets and liabilities, there’s another way to gauge its financial health. Analyzing the funded ratio of the pension fund is a common method used to evaluate its overall health.

The funded ratio is the ratio of the plan’s assets to its liabilities. This calculation involves comparing the assets the pension plan has with the liabilities it owes to determine whether or not it has enough assets to pay its future retirees. If the ratio is less than 80%, it’s considered to be underfunded.

Funded Ratio Pension Status
Over 100% Overfunded
80-100% Fully Funded
60-80% Underfunded to some degree
Less than 60% Severely underfunded

It’s essential to keep an eye on the warning signs and funded ratios as they can provide insight into the financial health of your pension. So, it’s best to take the necessary steps as soon as possible to avoid any financial problems in the future.

Impact of Underfunded Pensions on Retirees

Retirees rely on their pensions to provide a steady source of income to support their post-work life. However, underfunded pensions can have severe consequences on retirees, leaving them struggling to make ends meet and forced to make difficult financial decisions to survive.

  • Reduced benefits: Underfunded pensions may have to reduce the amount of benefits paid to retirees, leaving them with less money to cover their expenses. This can be especially detrimental to those who are already living on a tight budget and may have to cut back on basic necessities like food and medication.
  • Increased risk of poverty: Retirees who have underfunded pensions are more likely to live in poverty. This can lead to further financial difficulties and negatively impact their quality of life. Many may have to rely on public assistance programs or family members for support.
  • Delayed retirement: Underfunded pensions may not provide enough income for retirees to comfortably retire. This can force them to delay their retirement, stay in the workforce longer, and postpone their plans for travel or hobbies they have been looking forward to.

It’s not just the retirees who are affected by underfunded pensions. The impact can also spread to the wider economy, as retirees with reduced spending power can result in less demand for goods and services.

The following table provides a snapshot of some of the major underfunded pensions and their estimated funding ratios as of 2020:

Pension Funding Ratio
Central States Pension Fund 34%
Illinois Teachers’ Retirement System 38%
Multiemployer Pension Plan 36%

Underfunded pensions can have a devastating impact on retirees and their families. As individuals, it’s essential to stay informed about the health of your pension plan and plan for contingencies. Hiring a financial advisor or taking additional income sources like part-time work can be beneficial to ensure a comfortable retirement.

Pension funding regulations and requirements

One of the most critical aspects of pension management is ensuring that the pension fund remains adequately funded. Failure to maintain adequate funding levels can have significant consequences for both the pension plan member and the sponsoring company.

Here’s what you need to know about pension funding regulations and requirements:

  • Minimum Funding Requirements: Pension plans in the United States are subject to minimum funding requirements, meaning they must maintain a certain level of assets to meet future obligations. The funding level required by law depends on the plan’s funding status, when contributions were made, and other factors.
  • Funding Relief: Pension plans that are underfunded can take advantage of funding relief measures offered by the government. For example, they may be allowed to use a longer amortization period for calculating contribution requirements or use higher interest rate assumptions to calculate liabilities.
  • Plan Termination: If a pension plan becomes severely underfunded, the sponsoring company may be required to terminate the plan. The Pension Benefit Guaranty Corporation (PBGC) typically takes over the plan’s assets and liabilities, and retirees may see a reduction in their promised benefits.

In addition to these regulations, pension funds may also be subject to funding requirements set forth in the plan document. For example, the plan may require the sponsor to contribute annually to ensure adequate funding levels or outline how surplus assets will be handled. It is critical for both the plan sponsor and the plan participant to understand and comply with these requirements to ensure adequate pension funding.

The Pension Protection Act of 2006

The Pension Protection Act of 2006 (PPA) introduced significant changes to pension funding regulations. The PPA required that pension plans use more realistic assumptions when calculating funding levels, leading to increased contributions needed for many plans.

One significant change enacted by the PPA was the introduction of “funding target attainment percentage” (FTAP). The FTAP measures a pension plan’s funding level as a percentage of its target funding level, based on current market conditions, interest rate assumptions, and other factors. Failure to meet the FTAP can result in funding penalties and other consequences.

Additionally, the PPA created new standards for actuarial certifications concerning the plan’s funding status. These certifications help to ensure better communication and transparency between the plan sponsor, participants, and regulatory authorities.

Year Minimum Funding Requirement
2020 100%
2019 100%
2018 100%
2017 100%
2016 100%

As you can see, maintaining adequate funding levels for a pension plan can be complex. Understanding the applicable regulations and requirements is essential to ensure the financial security of the pension plan and the plan participant.

Strategies for Addressing Underfunded Pensions

Underfunded pensions can cause a lot of worry and stress for workers who are relying on these funds to have a comfortable retirement. If you suspect that your pension is currently underfunded, there are several strategies that you can consider in order to address this issue. Below are some of the most effective solutions:

  • Adjust your budget: If you believe that your pension may not provide enough income for you in retirement, it’s important to start looking at your current budget and expenses in order to see what you can cut back on. Consider items like entertainment expenses, travel, and luxury services. By lowering your overall expenses now, you can help stretch your pension dollars even further.
  • Maximize other retirement savings options: If you have other retirement savings options available to you, now is the time to consider maximizing them. For example, if you have a 401(k) or IRA, you may want to consider increasing the percentage of each paycheck that goes into these accounts. This can help supplement your pension income in retirement.
  • Consider working longer: For many retirees, working a little bit longer can provide a significant boost to their retirement savings. By delaying retirement by a few years, you can continue to save money, earn more income, and allow your pension fund to continue to grow.

If you’re still worried about how to address your underfunded pension, you may want to consider speaking with a financial advisor or retirement planning professional. These professionals can help you develop a personalized plan that suits your unique financial situation and goals.

It’s important to remember that there’s no one-size-fits-all solution for how to deal with an underfunded pension. Each individual’s situation is unique, so it’s important to take a proactive approach to tackling this challenge. By taking action now, you can help ensure a more secure and comfortable retirement in the years to come.

Ways to Address Underfunded Pensions

  • Adjusting your budget
  • Maximizing other retirement savings options
  • Consider working longer

Additional Considerations for Addressing Underfunded Pensions

If your pension is significantly underfunded, you may need to take more drastic action in order to ensure your financial security during retirement. Here are some additional considerations:

  • Consider a partial lump-sum: Some pension plans offer participants the option to take a partial lump sum instead of receiving monthly payments. This can be a good option if you need a little extra money right now, but it’s important to remember that this will reduce your overall pension income in the long run.
  • Explore annuity options: Depending on your pension plan, you may be able to purchase an annuity product in order to supplement your pension income. This can provide you with additional protection against inflation and market risks.
  • Explore other income streams: If you’re looking to supplement your pension income, there are a variety of other income streams available depending on your age, health, and financial situation. For example, you may consider taking on a part-time job or exploring rental property income streams.
  • Re-evaluate your retirement goals: If your pension fund is significantly underfunded, it may be time to re-evaluate your retirement goals and expectations. Consider lowering your expectations and scaling back your plans in order to ensure a more financially stable future.

Comparison of Strategies for Addressing Underfunded Pensions

Strategy Pros Cons
Adjusting budget Can help stretch pension dollars further May require significant lifestyle changes
Maximizing other retirement savings options Can supplement pension income May require sacrificing current lifestyle expenses
Consider working longer Can provide extra savings and pension growth May not be feasible depending on age/health
Partial lump-sum Provides additional money now Reduces overall pension income in long run
Explore annuity options Provides additional income stream and protection against market risks May not be available in all pension plans
Explore other income streams Provides additional income to supplement pension May require further investment or effort
Re-evaluate retirement goals Can help create financially stable future May require significant change in plans or expectations

As you can see, there are a variety of options available when it comes to addressing an underfunded pension. The key is to take a proactive approach and explore all of your options in order to find the solution that works best for you and your unique financial situation.

How Do I Know If My Pension is Underfunded?

Here are some frequently asked questions about pension underfunding:

1. What does it mean for a pension to be underfunded?

Underfunding occurs when the value of a pension plan’s assets is less than the amount of benefits it has promised to pay out in the future.

2. How can I check the funded status of my pension plan?

Your employer or plan administrator should provide you with an annual report that includes the funded status of the pension plan. You can also check the plan’s annual Form 5500 filing, which is available online.

3. What happens if my pension plan is underfunded?

If a pension plan is underfunded, there is a risk that it may not be able to pay out all the benefits promised to plan participants. The government may step in to help fund the plan, but there is no guarantee.

4. Can I do anything to protect my pension if it’s underfunded?

One way to protect your pension is to stay informed about the funded status of the plan and the actions being taken to address any underfunding. You may also want to consider diversifying your retirement savings across multiple sources of income.

5. Are all pension plans at risk of being underfunded?

No, not all pension plans are at risk of underfunding. Some plans are well-funded and have taken steps to manage their liabilities and assets.

6. What are some warning signs that my pension plan may be underfunded?

If your employer is experiencing financial difficulties, if your pension plan contributions have been reduced, or if you are offered a lump sum payment instead of a guaranteed pension benefit, these may be warning signs that your pension plan is underfunded.

Closing Thoughts

Thanks for taking the time to learn more about pension underfunding. Remember, staying informed and taking action to diversify your retirement savings can help protect your financial future. Please visit us again for more helpful tips and advice!