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Is a book-reserving approach strictly an unfunded approach to financing benefits?

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asked Mar 28 in BUS 4027W - Actuarial Risk Management by A.mabaso (750 points)
retagged Mar 28 by A.mabaso

From what I understand, book reserving is an unfunded approach to financing benefits where a company/employer decides not to invest monies in external funds but keeps the funds (maybe invests the funds into a property under its own name) so that when benefits fall due, the funds can be used to cover them. 

On one hand this strikes me as a good example of PAYG funding but on the other hand, if the "reservers" are very deliberate with their investing strategies (playing the same role as an external fund manager would) then couldn't one perhaps say that this is just a risky funded approach?

1 Answer

+1 vote
answered Mar 30 by Alessandro (360 points)

Book reserved schemes are ones in which the monies recieved are not invested externally but rather recorded in the sponsor's balance sheet as reserves or provisions. This is most common for an occupational pension plan. 

Some funds may be recorded in seperate accounts for the purpose of financing benefits, but are not legally or contratually recognised as pension plan assets for the explicit use of financing the future benefit payment requirements and thus this financing method is still classified as a unfunded approach. 

As with PAYG, this method of financing is not common, and if it is occuring, requires insurance of the plan sponsor against bankruptcy. 

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