Pension Glossary
Plain-English definitions for 33 pension and retirement terms. Understand funding ratios, PBGC coverage, ERISA rules, and what they mean for your retirement security.
Funding & Valuation
Funding Ratio
The ratio of a pension plan's assets to its actuarial liabilities, expressed as a percentage.
Unfunded Liability
The dollar amount by which a pension plan's liabilities exceed its assets.
Actuarial Assumption
Estimates used by actuaries to project future pension costs, including investment returns, mortality rates, and salary growth.
Pension Obligation
The total present value of all future benefits a pension plan has promised to current and former employees.
Discount Rate
The interest rate used to calculate the present value of future pension obligations.
Amortization Period
The number of years over which a pension plan spreads the payments needed to eliminate its unfunded liability.
Pension Smoothing
Actuarial techniques that spread investment gains and losses over multiple years to reduce volatility in pension contributions.
Pension Obligation Bond (POB)
Bonds issued by a government entity to borrow money and invest it in its pension fund, essentially a leveraged bet on investment returns.
Normal Cost
The annual cost of pension benefits earned by active employees during the current year.
Actuarial Valuation
A periodic assessment by an actuary that determines a pension plan's funded status and required contributions.
Annual Required Contribution (ARC)
The amount a pension plan sponsor should contribute each year to keep the plan on track toward full funding.
Plan Types
Defined Benefit Plan
A pension plan that guarantees a specific monthly benefit at retirement, typically based on salary and years of service.
Defined Contribution Plan
A retirement plan where the employer and/or employee contribute a set amount, but the final benefit depends on investment performance.
401(k) Plan
An employer-sponsored defined contribution retirement plan that allows employees to save and invest a portion of their paycheck before taxes.
Multiemployer Plan
A pension plan maintained by two or more unrelated employers under a collective bargaining agreement, common in construction, trucking, and entertainment.
Hybrid Plan
A pension plan that combines features of both defined benefit and defined contribution plans, such as a cash balance plan.
Cash Balance Plan
A type of defined benefit plan that expresses benefits as a hypothetical account balance rather than a monthly annuity.
Benefits & Payouts
Vesting
The process by which an employee earns a non-forfeitable right to employer-provided pension benefits.
Accrued Benefit
The portion of a pension benefit that an employee has earned to date based on their years of service and salary.
Cost-of-Living Adjustment (COLA)
An annual increase to pension benefits designed to help retirees keep pace with inflation.
Social Security Offset
A provision that reduces pension benefits by a portion of the retiree's Social Security benefit to avoid "double-dipping."
Regulation & Law
Pension Benefit Guaranty Corporation (PBGC)
A federal agency that insures private-sector defined benefit pension plans and pays benefits when underfunded plans are terminated.
Employee Retirement Income Security Act (ERISA)
The 1974 federal law that sets minimum standards for private-sector pension and health plans to protect participants.
Fiduciary Duty
The legal obligation of pension plan trustees and managers to act solely in the best interest of plan participants.
Pension Benefit Guaranty
The insurance protection provided by the PBGC that guarantees pension benefits up to a legal maximum if a plan fails.
Risk & Crisis
Withdrawal Liability
The financial obligation an employer owes when it stops contributing to a multiemployer pension plan.
Plan Termination
The process of ending a pension plan, either voluntarily by the sponsor or involuntarily by the PBGC.
Frozen Pension
A pension plan that has stopped accruing new benefits for some or all participants while continuing to pay benefits already earned.
Benefit Suspension
A reduction in pension benefits for participants in severely underfunded multiemployer plans, authorized under the Multiemployer Pension Reform Act.
Pension Derisking
Strategies used by plan sponsors to reduce pension-related financial risk, including lump-sum buyouts and annuity purchases.
Investment
Assumed Rate of Return
The investment return a pension plan expects to earn on its assets over time, typically 6-8% for public plans.
Pension Fund Investment
The portfolio allocation strategy used by pension plans to grow assets and meet future benefit obligations.
Mortality Table
Statistical tables that predict life expectancy and death rates, used by actuaries to estimate how long pension benefits must be paid.
Common Questions
What is a funding ratio?
A funding ratio compares a pension plan's assets to its liabilities. A plan with $80M in assets and $100M in liabilities is 80% funded. Plans below 80% are considered underfunded.
What does the PBGC do?
The Pension Benefit Guaranty Corporation insures private-sector defined benefit plans. If a covered plan fails, PBGC pays benefits up to a legal maximum of about $81,000/year for a 65-year-old retiree.
What is the difference between a defined benefit and defined contribution plan?
A defined benefit plan guarantees a specific monthly pension at retirement. A defined contribution plan (like a 401(k)) has no guaranteed benefit — the payout depends on how much was contributed and how investments performed.