Fully Funded: What it Means, How it Works

What Is Fully Funded?

Fully funded is a description of a pension plan with sufficient assets to provide for all accrued benefits and meet future obligations.

To be fully funded, the plan must make all anticipated payments to current and prospective pensioners. Funding status is determined by outside actuaries, indicating the financial health of the plan. This is in contrast to an underfunded pension that lacks enough assets to meet its obligations.

Key Takeaways

• Fully funded describes a pension plan with enough assets to satisfy all current and future retiree obligations.
• Companies strive for fully funded status to avoid a funding shortfall for workers.
• Financial statements show a fully funded plan status in the company’s footnotes.

Understanding Fully Funded

Companies provide annual benefit statements indicating whether the pension plan is fully funded and its financial strength.

A fully funded pension plan has the stability to make current and future benefit payments. It relies on capital contributions and investment returns for stability.

Funded status refers to accumulated assets set aside for retirement benefits. The formula is:

Funded status = plan assets – projected benefit obligation (PBO)

For example, as of June 30, 2022, the CalPERS fund reported a funded status of 72% with $440 billion in assets.

Underfunded pensions cannot meet promised cash flows for current and retired workers. Overfunded plans have more assets than liabilities, reserved for current and future retirees.

Fully Funded and Pension Footnote in Financial Statements

The pension note in a company’s financial statements outlines the corporate pension plan, typically after long-term liabilities. Pensions are sometimes considered off-balance-sheet financing.

Pension fund accounting and footnotes can be complex. The defined benefit (DB) pension plan is popular, where employees know the terms of their benefits. The company assumes investment risk to meet obligations.

In contrast, defined contribution plans like 401(k)s do not promise future benefits. Employees bear the investment risk.