Pension funds

Examples of Pension funds in the following topics:

• Contractual Saving

  • Contractual saving institutions are insurance companies and pension funds.
  • Pension funds are another contractual savings institution.Many people save money for retirement, and pension funds become a vital form of saving.Some employers sponsor pension funds as a job benefit, or workers can voluntarily pay into personal retirement accounts.Then the financial companies manage the pension funds, and they invest pension funds into the financial markets.Pension fund managers can accurately predict when people will retire and usually invest in long-term securities, such as stocks, bonds, and mortgages.A person can only receive benefits from the pension fund after the person becomes vested.Vested means employees must work for their employer for a time period before they can receive the benefits from the pension plan.Time period varies for the pension funds.For example, some city governments require a person to be employed by the city for 10 years before this person becomes 100% vested in the city's pension plan.
  • Employers have three reasons to offer pension plans to employees.First, the pension fund managers can more efficiently manage the fund, lowering the pension funds' transaction costs.Second, the pension funds may offer benefits such as life annuities.A life annuity is a worker contributes money into the annuity until he retires.Then the worker receives regular payments every year from the annuity until his death.Life annuities could be expensive if a worker buys them individually.However, a large employer with many employees can request discounts from pension plans.Finally, the government does not tax the pension fund as workers invest funds into it, allowing the fund to grow faster.Nevertheless, government usually imposes taxes on withdrawals from a pension fund.If the employer offered higher wages and no pension plans to the employees, then the government taxes the greater income, reducing the amount an employee could invest into a retirement plan.
  • Employers have two choices for the ownership of a pension plan.First, employees own the value of the funds in the pension plan, called a defined contribution plan.If the pension fund is profitable, subsequently, the retired employees will receive greater pension income.If the pension fund is not profitable, then the retired employees will receive a low pension income.Companies that have a defined-contribution plan are likely to invest the pension funds into the companies' own stock.That way, employees have an incentive to be more productive because the value of their pension plan depends on their company's profitability.However, this pension fund becomes dangerous if this company bankrupts.Then the employees own worthless stock.One infamous case was the Enron collapse in 2001.Some employees were millionaires until their stock portfolios collapsed in value overnight.Second, the most common type of plan is the defined-benefit plan.An employer promises a worker a specific amount of benefits that are based on the employee's earnings and years of service to the company.If this pension fund is profitable, the company pays the promised benefits and retains the remaining funds that are not paid to the retired employees.If the pension fund is unprofitable, then the company pays the promised benefits out of its own pocket.
  • Federal and state governments regulate the pension funds.Regulations require the managers of the pension funds to disclose all investments.That way, employees know which securities the pension fund managers have invested in.Regulations help prevent fraud and mismanagement.Unfortunately, a pension fund will bankrupt, when the company where the employees work bankrupts.Consequently, Congress created the Pension Benefit Guaranty Corporation that insures pension fund benefits up to a limit if the company cannot meet its obligations.Some economists believe a pension fund disaster will occur for state and local government retirees after 2012.Many state and local governments offered generous defined-benefit plans to public employees, and they have not placed enough money aside to fund the pension plans.

• Market Actors

  • Investors can include: pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, and hedge funds.
  • Other classes of intermediaries include: credit unions, financial advisers or brokers, collective investment schemes, and pension funds.
  • A pension fund is any plan, fund, or scheme that provides retirement income.
  • Pension funds are important shareholders of listed and private companies.
  • The largest 300 pension funds collectively hold about $6 trillion in assets.

• Purchase Process

  • Most individuals purchase bonds via a broker or through bond funds.
  • Bonds are bought and traded mostly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies, hedge funds, and banks.
  • Insurance companies and pension funds have liabilities which essentially include fixed amounts payable on predetermined dates.
  • Bond funds typically pay periodic dividends that include interest payments on the fund's underlying securities plus periodic realized capital appreciation.
  • Most bond funds pay out dividends more frequently than individual bonds.

• Overview of Pension Accounting

  • So, the company must invest in a fund in order to meet its obligations to the employee.
  • The last complication comes from the rules that require companies to prevent over/under stating the pension funds.
  • The employer (sponsor) reports pension expense on the income statement, and a pension liability which is the sum of two accounts, accrued/prepaid pension cost and additional liability, and an intangible asset-deferred pension cost (if required).
  • In addition to reporting the pension expense on the income statement companies should disclose the following information about the pension plan:
  • Plan description (including benefit formula, employee groups covered, funding policy. and types of assets held)

• Answers to Chapter 5 Questions

  • Mutual funds and finance companies.
  • For example, Vanguard offers mutual funds, while GMAC offers financing for automobiles.
  • Insurance companies and pension funds.
  • For example, AIG is a large insurance company, while TIAA-Cref is a pension company for teachers and professors.

• Beta Coefficient for Portfolios

  • A pension fund that seeks to maximize its reward and limit its risk might be interested in each of these portfolios.
  • But let's say you have $300,000 to invest; you could put that in a fund that is indexed to the S&P 500 and is perfectly correlated with it.
  • Every time the S&P gains 1%, your fund nets you 100,000 in fund A and S Misplaced &3,000 and your position in fund B pays you 2,000, which is less damage than you would have suffered on your position in the S&P index fund.
  • On days when the S 3,000 and your fund A position loses 2,000 and your upside is limited by the same amount, your downside is reduced.
  • A pension fund is a good example of an institutional client that could extend the principles of diversification to a pool of blended portfolios.

• Institutions, Markets, and Intermediaries

  • A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities.
  • A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities having a surplus of funds (savers) to those running a deficit of funds (borrowers).
  • Banks provide a safe and accessible environment for individuals and economic entities to deposit excess funds Additionally, banks also provide a service by packaging deposits into loans that are made available to economic agents (individuals and entities) in need of funds.
  • Other financial intermediaries include: credit unions, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers.
  • However, in conjunction with increasing access to funds, through their ability to aggregate funds, intermediaries also reduce the transaction and search costs between lenders and borrowers.

• A Nation of Investors

  • Between 1989 and 1995, the portion of all U.S. households owning stocks, directly or through intermediaries like pension funds, rose from 31 percent to 41 percent.
  • There are dozens of kinds of mutual funds, each designed to meet the needs and preferences of different kinds of investors.
  • Some funds seek to realize current income, while others aim for long-term capital appreciation.
  • Overall, the number of funds jumped from 524 in 1980 to 7,300 by late 1998.
  • At the end of the 1990s, they held $5.4 trillion in mutual funds, and the portion of U.S. households holding mutual fund shares had increased to 37 percent in 1997 from 6 percent in 1979.

• Employee Retirement Income Security Act

  • Studebaker's pension plan was so poorly funded that only 3,600 workers who were of retirement age received full pension benefits, 4,000 workers aged 40–59 who had ten years with Studebaker received lump sum payments valued at roughly 15% of the actuarial value of their pension benefits, and the remaining 2,900 workers received no pensions .
  • ERISA does not require employers to establish pension plans.
  • Under ERISA, pension plans must provide for vesting of employees' pension benefits after a specified minimum number of years.
  • Under ERISA, minimum funding requirements were established for defined benefit plans.
  • The funding requirement under PPA is simply that a plan must stay fully funded (that is, its assets must equal or exceed its liabilities).

• Pensions and Unemployment Insurance

  • Employers are not required to sponsor pension plans, but the government encourages them to do so by offering generous tax breaks if they establish and contribute to employee pensions.
  • The amount of money available to employees upon retirement, then, depends on how much has been contributed and how successfully the employees invest their own the funds.
  • Although the program is run by a federal agency, the Social Security Administration, its funds come from employers and employees through payroll taxes.
  • Employers pay taxes into a special fund based on the unemployment and benefits-payment experience of their own work force.
  • States hope that surplus funds built up during prosperous times can carry them through economic downturns, but they can borrow from the federal government or boost tax rates if their funds run low.