Unfunded Pension Plan

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DEFINITION of 'Unfunded Pension Plan'

An employer managed retirement plan that uses the employer's current income to fund pension payments as they become necessary. This is in contrast to an advance funded pension plan where an employer sets aside funds systematically and in advance to cover any pension plan expenses such as payment to retirees and their beneficiaries.

BREAKING DOWN 'Unfunded Pension Plan'

A pension plan is a program offered by certain employers that provides a salary replacement when an employee is no longer working (for example, when the employee retires). When employers offer a pension plan, they can plan for the anticipated financial requirements of the pension plan and set aside a certain amount of money on a regular basis - and invest the money to ideally grow the fund. Conversely, certain employers elect to fund the pension plan out of current earnings. This is a pay-as-you-go pension plan, and the future of such plans can often be put in danger by unexpected events.

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