Quote:
Originally Posted by JoelJohnson
Many think that a company's pension is guaranteed, they point to the "fact" that it is "fully" funded. But, it is only as solid as the company itself (or whoever backed it). Sometimes a pension put in trust to a large company that is in "good shape", but any company can get into trouble ( List of bank failures in the United States (2008–present) - Wikipedia) and the pension go with them. |
Saying a pension is fully funded can be very misleading. A pensions funding status is based on an actuarial formula that has assumptions about both the future investment returns of the assets backing the pension liabilities as well as what the value of the plans liabilities are. Underfunded plans are required by pension law to add funds to the plans assets to help bring them toward full funding status. I don't recall exactly when, but several years ago the guidelines outlining these key assumptions were relaxed, making underfunded plans seemingly look to be more fully funded without any funding infusion. Kind of a smoke and mirrors game.
Since interest rates are so low, pension plans tend to be heavily invested in stocks, making them very vulnerable to swings in the stock market. A large correction in the equity market would leave most plans funding status in serious jeopardy. Simple math, the value of the plans assets would plummet while the liabilities wouldn't change.