Underfunded defined benefit pension plans are a hot topic right now – mostly for all the wrong reasons. They get in the way of corporate deals, are hugely costly to address (both in terms of hard cash and management time) and, without careful management, can even cause the downfall of the company that was benevolent enough to set up the plan in the first place.
The problem lies in the defined nature of the benefits payable under these arrangements. Typically, these are set out in the plan’s rules and defined as equivalent to a proportion of the individual’s final salary. Because of the extended timescales over which pension schemes operate – and the variables at play, such as investment returns and inflation – it is almost impossible to know ahead of time exactly how much money will be needed to provide the defined benefit promised to any given individual when it falls due for payment.
