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Pension Plans: Funded Status

Moneyzine Editor
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Moneyzine Editor
2 mins
November 6th, 2024
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Definition

The term pension plan funded status refers to the net difference between the assets held in the plan and its projected benefit obligation. The reconciliation between the plan's assets and liabilities will appear in the notes to the company's financial statements.

Explanation

Companies will provide employees with a pension plan as part of a larger array of employment benefits. Pension plans are structured by companies to provide a periodic and reliable source of income when the employee reaches the plan's normal retirement age.

The FASB Statement of Financial Accounting Standards No. 87 requires firms to measure and disclose pension obligations as well as the performance and financial condition of their plans at the end of each accounting period. The liabilities associated with pension plans and the assets the company has set aside to fund those costs are not disclosed on the company's balance sheet. Instead, companies will compare the fund's assets to its projected benefit obligation (liability) to derive the plan's funded status, which will fall into two broad categories:

  • Overfunded Plan: if the plan's assets are greater than its projected benefit obligation, the plan is termed overfunded.

  • Underfunded Plan: if the plan's assets are less than its projected benefit obligation, the plan is termed underfunded.

Example

The following example illustrates how a pension's funded status might appear in the notes to a company's financial statement.

Pension Plan Funded Status
Vested Benefit Obligation (VBO)$200,611
Non-Vested Benefits$10,031
Accumulated Benefit Obligation (ABO)$210,642
Effect of Increases to Compensation$37,915
Projected Benefit Obligation (PBO)$248,557
Current Market Value of Plan Assets$236,129
Amortization of Gains and Losses($9,942)
Total Plan Assets$226,187
Over or (Under) Funding of Pension Plan($22,370)

Related Terms

pension plan, defined benefit plan, defined contribution plan, pension obligation, accumulated benefit obligation, vested benefit obligation, projected benefit obligation, pension expense, pension plan assets

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