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Terminal Funding vs Just in time Funding

Discussion in 'CA1' started by Tong_Tong, Feb 22, 2018.

  1. Tong_Tong

    Tong_Tong Active Member

    Hello,

    I just want someone to confirm my understanding.

    Under terminal funding. The company will set up the fund at the last moment just before the benefit is payable. E.g. Just before pension payment is about to start, the company will set up the fund to cover this. That will mean the initial tranche of benefit will be secure, but future pension payment will not be as secure?

    Just in time is kinda like terminal except, it is triggered by an external event e.g. company's solvency is threatened. So fund is set up to cover as much of future benefits as possible.

    Thanks
     
    Tong_Tong, Feb 22, 2018
    #1
  2. Helen Evans

    Helen Evans Ton up Member Staff Member

    Hello

    Yes your thinking is correct. The terminal funding approach means no money is set aside for the member until the benefit payments start, and then all the money is set aside that is expected to be needed to provide that member's benefits when the first benefit payment is made. So terminal funding lacks security for a member up until the point when the benefit starts, when it changes to being fully funded and therefore secure.

    Your thinking about just-in-time funding is also correct. The aim is to set aside enough to cover the promised benefits if the external event occurs. Note if the external event does not occur and our member reaches retirement then their benefit can be provided using PAYG or terminal funding approach.
     
    Helen Evans, Feb 22, 2018
    #2
    Tong_Tong likes this.

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