3.7.2 Underfunding
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A defined benefit scheme can be underfunded, that is, its assets
are less than the accrued liabilities for benefits in respect of
service to date. This would mean that if the scheme was wound up
by the employer, there would be insufficient money to provide the
promised benefits. In these circumstances, the scheme becomes a
creditor of the employer.
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If the scheme is ongoing, however, the actuary will take account
of the deficit in recommending a change to the contribution rate,
with the intention that the deficit will be reduced by future contributions,
and eliminated over a period of time.
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A deficit can arise as a result of many different circumstances,
including poor investment performance, higher than expected salary
increases or worsening annuity rates. Provided the scheme is continuing,
and the deficit is being dealt with, there is nothing untoward about
this situation
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