fizkes – Shutterstock
From student loans, to medical bills, to simply putting food on the table, so much of managing your finances can feel like it comes down to getting by day-to-day. Retirement, meanwhile, feels like a distant dream. How can you even think about maxing out your 401(k) or Roth IRA when you can barely afford rent? However, the best thing you can do for your retirement funds is always to start saving now..…Story continues…..
By: Meredith Dietz
Source: Lifehacker
.
Critics:
A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold about USD$6 trillion in assets.
In 2012, PricewaterhouseCoopers estimated that pension funds worldwide hold over $33.9 trillion in assets (and were expected to grow to more than $56 trillion by 2020), the largest for any category of institutional investor ahead of mutual funds, insurance companies, currency reserves, sovereign wealth funds, hedge funds, or private equity.
A public pension fund is one that is regulated under public sector law while a private pension fund is regulated under private sector law. In certain countries, the distinction between public or government pension funds and private pension funds may be difficult to assess. In others, the distinction is made sharply in law, with very specific requirements for administration and investment.
For example, local governmental bodies in the United States are subject to laws passed by the states in which those localities exist, and these laws include provisions such as defining classes of permitted investments and a minimum municipal obligation. It is important to distinguish difference between Pension plan, funds and firm. A pension plan is a benefits program set up and sustained by an employer or an employee group.
They are managed by state or private firms as well as pension funds. Pension funds are financial mechanisms that provide retirement income for employees after their working life. They work by accumulating contributions from employers, and sometimes employees, which are then invested to grow over time. Upon retirement, employees receive benefits, typically calculated as a percentage of their average salary during their working years.
For instance, consider a scenario where a pension scheme offers a payment equivalent to 1% of an individual’s average salary over the last five years of their employment for each year they served with the employer. Thus, if an employee worked for 35 years at the company and had an average final salary of $60,000, they would be entitled to an annual pension of $21,000. It is important to point out that one cannot usually take early withdraws or loan from pension.
Public sector pensions, like the California Public Employees’ Retirement System (CalPERS), often include cost-of-living escalator and can be more generous than private sector pensions. Private pension plans are regulated by federal laws such as the Employee Retirement Income Security Act (ERISA) and are insured by the Pension Benefit Guaranty Corporation (PBGC), which guarantees benefits if a pension plan fails.
Pension funds can make investments into stocks, bond, real estate, and other assets. However, they have to be prudently managed compared to other types of funds due to their lower risk tolerance. For many years, they mainly invest into stable stocks and bond. In order to keep a high returns, with changing market conditions, they started to invest into other assets. Currently, many pension funds are moving away from managing active stock portfolios towards passive investment methods, focusing on index funds and exchange-traded funds (ETFs) that replicate market indices.
Additionally, there’s an increasing trend to diversify into alternative assets like commodities, high-yield bonds, hedge funds, and real estate. Newer investment tools for pension funds include asset-backed securities, such as those tied to student loans or credit card debt, which are used to boost returns. Investing to Private equity is also rising in popularity; these are long-term investments in non-public companies, aimed at achieving substantial profits through eventual sales when these companies reach maturity.
Furthermore, real estate investment trusts (REITs) are becoming a frequent choice for pension funds due to their passive investment approach in the real estate sector. Direct investments in commercial properties like office buildings, warehouses, and industrial parks are also prevalent. Pension funds are important financial institutions which are managing the retirement savings of millions.
Effective governance in these entities is crucial not only to safeguard these funds but also to ensure they meet their future obligations to pensioners. The governance structures, strategies, and practices of pension funds significantly influence their stability, performance, and the trust of their stakeholders. Proper governance ensures that decisions are made transparently and that fund managers are accountable to stakeholders, including employees, retirees, and employers.
According to the OECD Guidelines for Pension Fund Governance,[12] the governance structure should clearly identify and separate operational and oversight responsibilities. Every pension fund should have a governing body, accountable to the pension plan members and beneficiaries. This body is ultimately responsible for ensuring adherence to the terms of the arrangement and the protection of the best interest of plan members and beneficiaries.
The governing body should also meet minimum suitability standards to ensure a high level of integrity, competence, experience, and professionalism. Additionally, there should be adequate internal controls in place to ensure compliance with the law. First concepts of providing retirement benefits has roots in ancient civilizations such as Rome and Greece.
The pension system as we know it, has roots in the 19th century. German Chancellor, Otto von Bismarck, came in 1889 with an first modern pension scheme. His goal was to help older German´s citizens. However, this idea came from the United States of America. In 1875 American Express Company introduced its own pension plan.
During early 20th century pension plans for public employees were growing, which resulted in creating U.S. federal retirement plan, known a Social Security in 1935.After World War II, pension funds became primary tool for providing retirement benefits, which was supported by growth of labour unions. By the 1970s, evolved and became significant member of financial markets, because they were holding large amount of assets.
But in 1980s and 1990s pension funds faced significant challenges. Stocks market crash in 1987 and recession in the early 1990s had negative impact on pension funds. Furthermore, demographic shifts and rising life expectancies placed pressure on these funds to sustain retirement benefits over extended durations.
The U.S. Government‘s Social Security Trust Fund, which oversees $2.57 trillion in assets, is the world’s largest public pension fund.
Here’s The Best Time To Convert Your 401k To A Roth IRA
Leave a Reply