What Is an Unallocated Annuity?

If your pension benefits come from an unallocated annuity, it simply means that you can't claim a specific investment in the annuity. In fact, the contract is not in your name but in the name of the company where you work. You only have a certificate stating that you have pension rights. Unallocated annuities serve other purposes, too.

When a business is bankrupt or a plant shuts down, there’s a court-mandated liquidation or the company merges with another company, and the company often puts funds in an unallocated annuity to create a terminal funding contract. Sometimes companies change the business's retirement plan. They may switch from a defined benefit plan to a 401k, for example. The company has an obligation to set aside the funds necessary to pay benefits from the original retirement plan. It uses an unallocated annuity in the form of a terminal funding contract to do this. A company establishes a terminal funding contract with the express purpose of fulfilling a previous obligation.

Initially employers used individual deferred annuity contracts as a method of funding pensions. In the 1950s, a second type of contract -- the deposit administration contract -- rose in popularity because it was more flexible. The insurance company holds the employer’s contributions in an unallocated annuity fund with the promise of a minimum return. As each employee retires, the insurance company removes enough money for an immediate annuity contract for the retirement benefits of that employee. Sometimes retirees receive the money directly from the contract. Instead of a contract number, the employee receives a certificate number.

Some unallocated annuities hold lottery funds. As each week the holders of lottery tickets face the disappointment of losing, the unclaimed amount for that week goes into an unallocated annuity. When there is a lottery winner, the money comes out of the fund.

All states have a state insurance guaranty association that protects consumers in the event of insurance company insolvency. The guaranty funds insure some unallocated annuities but not all of them. Those uninsured by the guaranty funds are unallocated annuities that fund qualified pensions insured by the federal Pension Benefit Guaranty Corporation.