What is an over-funded pension plan?
An over-funded pension plan is a corporate pension plan that has more assets than liabilities. In other words, there is a surplus of money needed to cover current and future pensions. Although the surplus can legally be recorded as business income, it cannot be paid to the shareholders of the company like other income, since it is reserved for current and future retirees.
Understanding a super-funded pension plan
Generally, pension plans become overfunded following a stock market boom (provided the pension plan is invested in stocks, as many are) or when a defined benefit plan is converted to a cash plan. It is generally more common for a pension plan to be underfunded, as investment deficits tend to be more common.
The level of funding of a pension plan is an indication of the health of the plan and the likelihood that the company will be able to pay your retirement benefits when you retire. If the pension plan is funded at more than 100%, it is an over-funded plan, and that is good for the beneficiaries. This means that the company has already saved more than enough money to pay the retirement benefits provided for current workers and retirees.
However, estimating the amount of money a business will need to pay its retirement obligations is not a simple business. An actuary creates mathematical models to try to predict how long employees and their spouses will live, future wage growth, at what age employees will retire, and the amount of money a business will earn by investing its savings. pension. The resulting estimate is the amount of money the business should have in savings.
How pension plans are overfunded
Actuaries calculate the amount of contributions a company must make to a pension, based on the benefits members receive or are promised and the estimated growth in plan investments. These contributions are tax deductible for the employer. The amount of money the plan ends up at the end of the year depends on the amount they have paid out to the members and the growth in investments they have made with the money. As such, changes in the market can lead to underfunding or overfunding of a fund. It is common for defined benefit plans to be overfunded in the hundreds of thousands, if not millions of dollars. Unfortunately, over-funding is of no use under the plan (beyond the sense of security it can provide to beneficiaries). An over-funded pension plan will not increase benefits to members and may not be used by the business or its owners.