Unfunded pension plan

(redirected from Unfunded Pension Scheme)

Unfunded pension plan

Provides for the employer to pay out amounts to retirees or beneficiaries as and when they are needed. There is no money put aside on a regular basis. Instead, it is taken out of current income.

Unfunded Pension Plan

A pension plan where a former employer pays pensioners out of current income. That is, the employer does not place money aside or invest funds on a regular basis to finance the pension. Obviously, an unfunded pension carries higher risk for both the pensioner and the employer; if the company goes through a difficult period, the pensioner may not have a pension for all his/her retirement while the employer has higher current liabilities.
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Samuelson (1958) pointed out long ago that in a steady state - where population structure is assumed constant, as is the contribution rate into a balanced PAYG pension scheme - the effective return on contributions made to an unfunded pension scheme is equal to the growth of the aggregate wage bill (which is the sum of growth in real wages per person and of the number of workers).
if an unfunded pension scheme of the type that currently exists had always been in place and continues into the future; 2.
Chart 2 shows OECD estimates of the scale of deficits that these demographic shifts could cause to unfunded pension schemes in various countries (see Roseveare et al (1996)).
This observation illustrates the obvious point that a comparison between funded and unfunded pension schemes depends crucially on the portfolio of assets that is acquired with contributions.
Unfunded pension schemes represent a form of insurance against such risks because the value of pensions paid to the current retired depends upon the labour income of another generation.
The implications of switching from unfunded to funded pension systems
Many public sector employees belong to unfunded pension schemes, whose costs are funded from current employer and employee contributions and the taxpayer.
Funding pensions in Scotland: would independence matter?

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