What is a pension plan?
A pension plan is a retirement program where an employee and/or an employer contribute funds during an individual’s working years, with the goal of providing income during that worker’s retirement.
When is a pension considered underfunded?
A pension plan is underfunded when it does not have enough assets and income to pay out the benefits that it is obligated to pay. Underfunding happens when companies or governments fail to contribute enough funds to pay out promised benefits, or when expected investment returns do not materialize.
What is the risk-free rate?
The risk-free rate of return is the interest rate an investor can expect to earn on an investment that carries zero risks. Since it is actually impossible to invest with zero risks, returns on U.S. Treasury bills are used as the closest representation.