Pension Shortfall

You run a pension plan for The National Chainsaw Juggler's Union. Your accountants believe that, based on the number of current members you have and their projected retirement needs (and massive long-term chainsaw-related medical bills they'll likely have, even in retirement), you need to have $2 billion in your fund. You currently have $200 million.

Uh-oh. Major pension shortfall.

The term refers to a circumstance when a pension plan doesn't have enough money to meet its eventual obligations. Basically, the employer or union (or whoever has sponsored the plan) has promised certain benefits in retirement, but doesn't have enough cash to deliver.

Shortfalls like this are a particular danger of defined pension plans. Usually, the culprit for the shortfall comes from weak investment performance. Due to the long-term nature of pension planning, funds rely on growth over time to build up enough money to cover benefits. Employees and the employer contribute to the fund, but much of the cash needed to pay for retirement expenses comes from investment gains. If those underperform, it can contribute to a pension shortfall.