Pensions

Question 1

Global Pension Fund Assets

Answer 1

• Money should put aside by employees in order to fund their pension payments in the future.
• Financial organisations invest this money in order to be able to meet the corresponding pension liabilities to provide the pension payments.

Question 2

Problems associated with pensions

Answer 2

• Many governments don’t have adequate funding to provide the pension schemes, hence leading governments to borrow money in an attempt to solve the problem, thus increasing the public debt.
• Due to an ageing population there is a strain on the pension schemes.

Question 3

Unfunded Schemes

Answer 3

• An unfunded or pay-as-you-go (PAYG) scheme is an employer managed retirement plan.
• PAYG pension plans use the company’s current income to meet their pension promise, bu there is no accumulated sum of money to pay pensions when required.
• It is not a viable scheme in the long-run due to an increasing ageing population and the dependency on the state.

Question 4

Funded Schemes

Answer 4

• Both employees and employers make regular payments to a pension fund.
• Pension funds invest the money into diversified portfolios hoping that the pension fund asset will grow and help pension plans meet their promise.

Question 5

Defined Benefit Scheme

Answer 5

• Schemes promise to pay out a fixed pension that is based on the number of years accrued and the level of final average salary.
• Fixed contributions are made by employers and employees.
• Actual pension payments depend on the portfolio performance of the pension fund and on how the terminal pension pot will be annualised.
• Since portfolio performance as well as annuity rates depend on several stochastic factors, it is possible that pensions at retirement may under or over than expected.

Question 6

Pension retirement formula

Answer 6

(years of contribution x accrual rate)/ average salary

Question 7

Personal/Private Pensions

Answer 7

• Choice for those who want to for their own pension.
• Recipients often make regular payments to pension provider.
• Pension providers invest money on behalf of their clients.
• Private pensions are very tax efficient since pension contributions are tax exempt.

Question 8

Self-invested personal pensions

Answer 8

• Contributions are allowed to control the type of investment made by their financial institutions.
• Same tax advantages as private pension schemes.

Question 9

Public Pensions

Answer 9

• Funded by the state through taxes and public money.

- Increases the burden on the government.

Question 10

Pension Fund Holdings

Answer 10

• Pension funds and insurance companies are long-term institutional investors
• In order to meet promises they must generate sufficient funds

Question 11

Regulations

Answer 11

Work-based pension schemes are regulated:

• to protect member’s benefit
• has the power to force companies to inject more money into pension schemes
• try to minimise claims on the PPF

Question 12

Pension Protection Fund

Answer 12

The PPF compensate for the companies who face difficulties that do not have sufficient funds to pay the pension promises.

Question 13

Institutional Shareholder Committee

Answer 13

• Set out behavioural principles for pension and insurance fund managers.
• Manager’s primary duty to be the members of a pension scheme.
• Committee is advising and encouraging managers to behave more like owners.