Chpater 23 - pricing and financing strategies, refer to unfunded benefit scheme, may I understand it as no immediate premium payment requirement for the members at the outset if there is no claim payment fall due for the scheme? if it is, an extreme example, a scheme only incorporate one member, so what he/she would receive from the scheme if a prescripted event occur would be what he/she required to pay to the scheme, on that case, what it mean by insurance or indemnity? In another word, a unfunded scheme is in essential a self-insured one, am i right?
in addition, if there is no any prescripbed event occur by the end of the coverage, unfunded approah would be equal to terminal funding and Just-in-time funding, i.e. no any actual premium payment requirement due, am i right?
There is only the one unfunded approach, pay-as-you-go. This approach to financing means that the money to fund the benefits is only found when each benefit payment is needed. I would not expect an individual to finance their own retirement provision this way but it is a common way of State benefits being financed and could possibly be used by an employer (although that wouldn't be a common approach). The idea would be that when the individual's benefits come into payment the sponsor (State / employer) finds the money to provide the benefits. If the benefit payment required is a single lump sum rather than a stream of payments then the method collapses to be the same as terminal funding. Just-in-time funding is different in that the trigger for the money being set aside is an event that might mean the employer is less able to support the scheme in the future, eg the employer being taken over by another company less willing to support the scheme. In this instance the money would need to be set aside prior to the takeover so member benefits are secured. I hope this helps Helen
but, I just found a point in Chapter 4, page 9, that said one of the main principles of insurance and pensions is pre-funding. on that case, is this point to some degree conflict with the above discussion? regarding the unfunded benefit scheme.
Hi ... I think the comment in Chapter 4 fits with the discussions above. Note the comment in chapter 4 goes on to say that pre-funding is a principle for 'individuals or corporate bodies'. As mentioned in the comments above it would be rare for an employer (ie corporate body) to use the unfunded approach (but much more acceptable for governments). I hope that helps Helen
