Have You Got An Underfunded Pension Plan?

What Is An Underfunded Pension Plan?

An underfunded pension plan can be defined as when a pension scheme's assets are less than its liabilities. This means that the benefits received on reaching retirement age will be less than the amount of money paid into the pension scheme. Underfunded Pension Plans impose large risks on their beneficiaries who are exposed to massive losses when pension schemes are ended and schemes with the worst funding records are those most at risk. The government has estimated that during the last eight years, as many as 65,000 people have lost 20% or more of their expected company pension following the collapse of the companies which employ them.

Why Has There Been An Increase In The Number Of Underfunded Pension Plans?

As pension funds have traditionally put about three-quarters of their funds in the stock market, the falling share prices have contributed to the problem of underfunded pension plans. In addition to this the aging population have put an extra strain on pensions, resulting in a growing crisis within the UK of underfunded pensions, with some employees faced with the prospect of receiving nothing at all on reaching their retirement.

What Has The Companies Response Been?

As the companies are realising that the company pension plans are not sustainable in the long-term, the trend has been to cut back on pensions benefits rather than risk cutting into company profits by shoring up the fund with hefty payments. The defined benefit plans are therefore being replaced by less-costly alternative pension plan, leaving employees rather out in the cold in the financial planning of their retirement. Traditionally bankrupt companies were only obliged to use the assets of the fund to pay pensions which resulted in the pension beneficiaries experiencing a dramatic decrease in their expected pension. It was estimated in 2003/4 alone more than 125 final salary pension schemes were wound up.

What Is The Government Doing?

In April 2005 the Government introduced the Pension Protection Fund - the PPF - in response to the growing underfunded pension plan crisis. The PPF assumes the responsibility of underfunded pension plans should the company declare bankruptcy. The employees under the retirement age will receive 90% of their expected pension and those of retirement age can expect to receive 100%. The pension schemes themselves will pay for the PPF by paying fees for each of their members.