Definition: Defined contributions funded schemes

Category: National accounts

A second type of funded pension scheme is usually called “defined contributions funded schemes". ESA95 uses the term “money purchase pension schemes” but the description that is given fully covers this category of funded scheme.
In this case, the individual pension benefits depend on the accumulated assets but the level of the future pensions is uncertain as individual households bear the whole financial risk attached to the invested assets of the accumulated reserves. Generally (but this is not a required condition), the participants in the scheme may have some individual choice in the orientation of the investment of their funds in one or more market segments (“risk profile”, financial manager).
As a result, the same amount of contributions accumulated during the same period may give rise to different amounts of pensions. The accumulation of the assets is in fact very similar to individual saving efforts. Normally, of course participants in the scheme cannot dispose of their holdings before retirement. However, it is generally observed (but this is not a required condition as regards the issue of classification) in
the case of early death, that all or part of the value of the claim may be transmitted to persons designated by the former holder.
The participants’ claim (AF.612) is valued at the market price of the assets invested.
As a result, by definition in ESA95, the net worth of such defined contributions funds is zero and the notion of under-funded or over-funded is not relevant in this context.
As there are no promised benefits, no comparison is appropriate. http://ec.europa.eu/eurostat/ramon/statmanuals/files/KS-BE-04-002-EN.pdf