Definition: Unfunded pension schemes

National accounts

“Unfunded pension  schemes”, frequently referred as to “Pay as you go systems”, are schemes where
one unit is “responsible” for the unconditional payment of the pensions and, therefore, takes the financial risk of payment of the benefits. The origin of the resources used for the payment does not matter. The unit may use other types of resources but may also modify the rules that fix the contributions and the benefits. Similarly the large diversity in arrangements that may be
observed, for instance in the way the participants’ rights are measured (such as percentage of earnings, points, monetary accounts, etc.) and the amounts of benefits determined (such as “flat pension”, percentage of earnings on a given period, period of contributions, age of retirement, etc) and adjusted during the retirement period, is quite secondary in this regard.
The accumulation of some reserves may also be observed, but there is in this case no intention to use invested assets as a major source of resources for payment of the future pensions. It is in addition a discretionary decision from the unit managing (running) the scheme that is also in a position to decide at any time on the (re-)allocation of these reserves. ESA95 Annex III.4 specifies that these funds they remain the property of government and not of the beneficiaries.
If a government unit is responsible for the management of an unfunded scheme, the scheme is undoubtedly a social security scheme.
Eurostat, "Classification of funded pension schemes and impact on government finance", 2004 edition, Office for Official Publications of the European Communities, 2004, Luxembourg

Search box