Business Glossary

insurance or annuity contract used in pension plans to purchase increments of retirement benefits through contributions for each employee paid into a fund. Benefits are guaranteed to employees at retirement; the insurance company is legally obligated to pay all benefits for which it has received premiums. Pension plans, in which no funds are available to purchase benefits prior to retirement involve unallocated funding instruments (benefits were not purchased at the time premium payments were made).

pension funding agreement under which funds paid into a retirement plan are not currently allocated to purchase retirement benefits. The funds of one plan cannot be commingled with funds of another plan, and the plan trustee guarantees neither principal nor interest of the funds deposited. At retirement the trustee can either purchase an immediate retirement annuity for the retiring employee or pay the benefits directly from the fund as they become due.