Overfunded Underfunded - AutomatedPensions.com
Overfunded Underfunded
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Updated: 15/Jun/06 11:15:51
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Overfunded/Underfunded

An Overfunded Defined Benefit Plan has, according to the particular basis being emloyed, more than sufficient assets to pay all plan liabilities. Conversely, an Underfunded Defined Benefit Plan does not have (according to the particular basis being emloyed) enough assets to cover all plan liabilities.

The statement that a plan is over or under funded must be stated within the context of what basis is being used in making the measurement and what the measurement is for. A plan may be Overfunded on one basis, but Underfunded on an alternate basis.

Different Actuarial Assumptions may be required for different purposes. Various laws as well as actuarial principles require the use of different assumptions for different purposes. For example, evalutating the sufficiency of assets to cover liabilities on a Plan Termination basis requires different assumptions than evaluating the health of an ongoing plan. Lower interest rates, if appropriate or required, will especially inflate the measurement of the liabilities and push the measurement in the Underfunded direction. Conversely, higher interest rates will give a lower value to the liabilities and push the overall measurement in the Overfunded direction.

In addition, Actuarial Methods may vary for different purposes. The method of measuring assets using a Market Value snapshot approach or a smoothed asset approach may be appropriate for different purposes. The acceleration of subsidized benefits may be required for one reason or inappropriate for another.

See also articles on Overfunded Defined Benefit Plans and Underfunded Defined Benefit Plans for a discussion of the problems encountered by each.