Unfunded schemes

Types of pensions

Defined benefit (DB) pension schemes are said to be ‘unfunded’ or ‘in deficit’ when the money (or assets) they hold is insufficient to cover the expected expenses of paying out the income that was promised to its employees. In other words, the assets are less than the liabilities. Funding levels are often expressed as a percentage – e.g. a DB scheme might be 85% funded, meaning assets are equal to 85% of liabilities so there is a 15% ‘shortfall’. If a scheme’s assets are higher than its liabilities, it is said to be ‘in surplus’.

The StatePension is similar in structure to a DB scheme and is sometimes also referred to as unfunded.

Defined contribution schemes can’t be in deficit since the pension provider does not guarantee any income at retirement.

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