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Difference in liquidity requirements for funded and unfunded schemes?

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asked Nov 9, 2017 in BUS 4027W - Actuarial Risk Management by Rowan (3,200 points)

To mitigate against liquidity risk, pension schemes can hold cash. But the notes say that this is not important for funded schemes because they can use the contributions and investments to provide for the outgo. It is important for unfunded schemes.
But can't the unfunded schemes also use the contributions and investments to provide for the outgo?

1 Answer

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answered Nov 9, 2017 by jolegutko (520 points)

Bizarrely, this section of the notes refers to PAYG EMPLOYER funds, which are very rare in pensions (I would say non-existent). But this is "benefit schemes" not pension funds, so this may be a scenario where the employer pays out some other benefit on a PAYG basis - like a health check payment, or child care benefits? Then there are no contributions, the money comes from employer balance sheet, and it may be good to have some liquidity for it?