What Does It Mean When a Pension Plan Is Overfunded?

An overfunded pension plan is more likely to be solvent when you retire.

An overfunded pension plan is more likely to be solvent when you retire.

If your company has a pension plan, read the plan's annual financial report to determine its funding level. The funding level gives you an indication of the likelihood that the company will be able to pay your retirement benefits when you retire. If the pension plan is more than 100 percent funded, it's an overfunded plan, meaning the company has already saved more than enough money to pay projected retirement benefits for current workers and retirees.

What it Means

A pension plan pays a monthly benefit to a participant when she retires until she dies based on her salary history and years of service. At least that's the way it's supposed to work; some companies get in financial trouble and can't guarantee that pension will be there forever. Having an overfunded pension plan is essentially a guarantee the benefits you've earned so far will be paid to you when you retire.

Planning Ahead

Estimating the amount of money a company will need to pay its future pension obligations is a complex task. An actuary creates mathematical models to predict how long employees and their spouses will live, how fast salaries will grow, at what age employees will retire and the amount of money a company will earn from investing its pension savings. The result is an estimate in dollars of the money the company should have in savings to pay its future pension obligations.

Weighing the Contributions

Based on the actuarial valuation, companies fund their pension plans with annual tax-deductible contributions to their funds. For example, if the current value of the money needed to pay future pensions is $1 million, and the plan's assets are valued at $950,000, the company must make a $50,000 contribution to keep the plan fully funded. If it can only afford to contribute $25,000, the plan is 2.5 percent underfunded. If the plan's assets are valued at $1.1 million, the plan is 10 percent overfunded.

The Underfunded Truth

You are fortunate if your pension plan is overfunded. As of 2014, almost all of the companies in the S&P 500 that have pension plans have underfunded plans. Companies such as AT&T, Boeing, Exxon Mobil, IBM and Ford have shortfalls of more than $10 billion each. Participants in underfunded plans might have to settle for a pension that's much smaller than what they earned if the plan becomes insolvent.

Photo Credits

  • Jupiterimages/BananaStock/Getty Images