What is a Pension Shortfall?
How Does a Pension Shortfall Work?
In a defined pension plan, where a company bears the risk of the investment of the pension pool and is obligated to provide the pension benefits to employees upon retirement, a poor investment performance by the investment pool may result in a pension shortfall. When a pension shortfall occurs, a company can try to increase the returns from its investment. More likely, however, a company must increase its cash contributions to the pension plan.
Why Does a Pension Shortfall Matter?
Such shortfalls and the required contributions by the companies to make up for the shortfall directly affect the company's net income. In particular, among legacy companies (i.e. older companies that have thousands of employees retiring each year), the risks of a pension shortfall increase substantially, especially during downturns in the investment markets. Many companies in this position, such as automakers, steelmakers, energy and chemical makers, and even communication companies have pension shortfalls that dramatically affect their profitability and, sometimes, their viability.
The US government passed the Pension Protection Act of 2006 to guard against pension shortfalls by requiring companies to increase their contributions to the pension funds if their investment pool asset valuation falls below 80% of the current pension obligation.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
About six years ago, I bought a stock at $5 a share that I later sold for more than $30 per share. That's a 500% increase. Not bad, right? Well, it so...Read More →
A new client recently came into my bank branch with a check for $10,000... he was ready to invest. He sat down in my office and told me that he wanted to buy gold. We don't sell gold...Read More →
The covered call strategy is a reliable way to generate income in your investment account on a monthly basis. Basically, this investment approach captures income by selling call option contracts,...Read More →