Pension Plan Liabilities

I’ve noticed that many cable news channel reports as well as reports in print media have been using the term “unfunded” to describe pension woes of municipalities. There are actually two terms that should be used to describe the pension liabilities: “unfunded” and “underfunded”.

An unfunded liability does not mean that the plan is underfunded. There is nothing intrinsically wrong with having an unfunded liability. Unfunded liabilities are a natural component of municipality funding, similar to a mortgage on residential or business property.

Underfunded means that the pension plan sponsor of the municipality has not made sufficient contributions to fund the present and future liabilities of promised benefits. In other words the municipality has not been making the “required annual contribution” to the plan perhaps for several years, or has increased benefits without appropriate funding.