Unfunded Pension Plan
Candlefocus EditorAs these unfunded pension plans are not funded with any assets, there are associated risks. For one, the amount of money being paid out in retirement benefits is subject to the whims of the employer. If the employer or government providing the benefit suddenly stops making its contributions, the employees will not have anything to look forward to in retirement. Additionally, the future of these pensions depend solely on the continuing viability of the company, so employees' retirement security could be compromised by an economic downturn such as the recent downturn in the economy, or closure of the business.
Apart from the risk factors, unfunded pension plans have a few advantages as well. These types of plans are typically easier to set up and manage. Employers do not need to worry about where to find the money to cover the pension payments as no money is actually invested in the account. Additionally, administrators of such pension plans do not need to worry about generating returns on money in the plan, so managing the plan is much simpler.
In conclusion, unfunded pension plans are an important component of retirement security for many businesses and individuals. However, due to the lack of actual investment in the plan, there are associated risks, and employers and their workers should be aware that there is no guarantee of retirement benefits with an unfunded pension plan. It is also important to plan ahead and ensure that employers are making sufficient contributions to ensure that retirement benefits can be provided over time.