In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment.^[1] It is a tax deferred savings vehicle that allows for the tax-free accumulation of a fund for later use as a retirement income. Pensions should not be confused with severance packages A severance package is pay and benefits an employee receives when they leave employment at a company. In addition to the employee's remaining regular pay, it may include some of the following:; the former is paid in regular installments, while the latter is paid in one lump sum.

The terms retirement plan or superannuation refer to a pension granted upon retirement Retirement is the point where a person stops employment completely . A person may also semi-retire by reducing work hours. Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to work any more (by illness or accident). In most.^[2] Retirement plans may be set up by employers, insurance companies, the government or other institutions such as employer associations or trade unions. Called retirement plans in the USA, they are more commonly known as pension schemes in the UK and Ireland and superannuation plans in Australia and New Zealand. Retirement pensions are typically in the form of a guaranteed life annuity A life annuity is a financial contract in the form of an insurance product according to which a seller —typically a financial institution such as a life insurance company—makes a series of payments in the future to the buyer (annuitant) in exchange for the immediate payment of a lumpsum (single-payment annuity) or a series of regular payments (, thus insuring against the risk Risk concerns the deviation of one or more results of one or more future events from their expected value. Technically, the value of those results may be positive or negative. However, general usage tends to focus only on potential harm that may arise from a future event, which may accrue either from incurring a cost or by failing to attain some of longevity The word "longevity" is sometimes used as a synonym for "life expectancy" in demography or to connote "long life", especially when it concerns someone or something lasting longer than expected.

A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labor unions A trade union or labor union (American English) is an organization of workers who have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members (rank and file members) and negotiates labor contracts (collective bargaining) with, the government, or other organizations may also fund pensions. Occupational pensions are a form of deferred compensation Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a date after which that income is actually earned. Examples of deferred compensation include pensions, retirement plans, and stock options. The primary benefit of most deferred compensation is the deferral of tax to the date at which the employee, usually advantageous to employee and employer for tax To tax is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law reasons. Many pensions also contain an additional insurance In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured or policyholder is the person or aspect, since they often will pay benefits to survivors or disabled beneficiaries. Other vehicles (certain lottery A lottery is a form of gambling which involves the drawing of lots for a prize. The word stems from the Dutch word loterij, which is derived from the noun lot meaning fate or destiny payouts, for example, or an annuity A life annuity is a financial contract in the form of an insurance product according to which a seller —typically a financial institution such as a life insurance company—makes a series of payments in the future to the buyer (annuitant) in exchange for the immediate payment of a lumpsum (single-payment annuity) or a series of regular payments () may provide a similar stream of payments.

The common use of the term pension is to describe the payments a person receives upon retirement, usually under pre-determined legal and/or contractual terms. A recipient of a retirement pension is known as a pensioner In common parlance, a pensioner is a person who has retired, and now collects a pension. This is a term typically used in the United Kingdom and Australia where someone of pensionable age may also be referred to as an 'old age pensioner', or OAP. In the United States, the term retiree is more common. In many countries, increasing life expectancy or retiree.

Types of pensions

Employment-based pensions (retirement plans)

A retirement Retirement is the point where a person stops employment completely . A person may also semi-retire by reducing work hours. Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to work any more (by illness or accident). In most plan is an arrangement to provide people with an income during retirement when they are no longer earning a steady income from employment. Often retirement plans require both the employer and employee to contribute money to a fund during their employment in order to receive defined benefits upon retirement. Funding can be provided in other ways, such as from labor unions, government agencies, or self-funded schemes. Pension plans are therefore a form of "deferred compensation". A SSAS is a type of employment-based Pension in the UK.

Social and state pensions

Many countries have created funds for their citizens and residents to provide income when they retire (or in some cases become disabled). Typically this requires payments throughout the citizen's working life in order to qualify for benefits later on. A basic state pension is a "contribution based" benefit, and depends on an individual's contribution history.

For examples, see National Insurance National Insurance in the United Kingdom was initially a contributory system of insurance against illness and unemployment, and later also provided retirement pensions and other benefits. It was first introduced by the National Insurance Act 1911, and expanded by the government of Clement Attlee in 1946 in the UK, or Social Security In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program in the USA.

Disability pensions

Some pension plans will provide for members in the event they suffer a disability. This may take the form of early entry into a retirement plan for a disabled member below the normal retirement age.

Benefits

Retirement plans may be classified as defined benefit or defined contribution according to how the benefits are determined ^[3]. A defined benefit plan guarantees a certain payout at retirement, according to a fixed formula which usually depends on the member's salary and the number of years' membership in the plan. A defined contribution plan will provide a payout at retirement that is dependent upon the amount of money contributed and the performance of the investment vehicles utilized.

Some types of retirement plans, such as cash balance plans, combine features of both defined benefit and defined contribution plans. They are often referred to as hybrid plans. Such plan designs have become increasingly popular in the US since the 1990s. Examples include Cash Balance and Pension Equity plans.

Defined benefit plans

A traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined by a set formula, rather than depending on investment returns. In the US, 26 U.S.C. The Internal Revenue Code is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes and statutory excise taxes. The Internal Revenue Code is published as Title 26 of the United States Code (USC), and § 414(j) specifies a defined benefit plan to be any pension plan that is not a defined contribution plan (see below) where a defined contribution plan is any plan with individual accounts. A traditional pension plan that defines a benefit for an employee upon that employee's retirement is a defined benefit plan.

Traditionally, retirement plans have been administered by institutions which exist specifically for that purpose, by large businesses, or, for government A government is the organization, or agency through which a political unit exercises its authority, controls and administers public policy, and directs and controls the actions of its members or subjects workers, by the government itself. A traditional form of defined benefit plan is the final salary plan, under which the pension paid is equal to the number of years worked, multiplied by the member's salary at retirement, multiplied by a factor known as the accrual rate. The final accrued amount is available as a monthly pension or a lump sum, but usually monthly.

The benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors. A simple example is a Dollars Times Service plan design that provides a certain amount per month based on the time an employee works for a company. For example, a plan offering $100 a month per year of service would provide $3,000 per month to a retiree with 30 years of service. While this type of plan is popular among unionized workers, Final Average Pay (FAP) remains the most common type of defined benefit plan offered in the United States. In FAP plans, the average salary over the final years of an employee's career determines the benefit amount.

Averaging salary over a number of years means that the calculation is averaging different dollars. For example, if salary is averaged over five years, and retirement is in 2009, then salary in 2004 in 2004 dollars is averaged with salary in 2005 dollars, etc, with 2004 dollars being worth more than the dollars of succeeding years. The pension is then paid in first year of retirement dollars, in this example 2009 dollars, with the lowest value of any dollars in the calculation. Thus inflation in the salary averaging years has a considerable impact on purchasing power and cost, both being reduced equally by inflation.

This effect of inflation can be eliminated by converting salaries in the averaging years to first year of retirement dollars, and then averaging.

In the United Kingdom The United Kingdom of Great Britain and Northern Ireland[note 7] is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning an archipelago including Great Britain, the northeastern part of the island of Ireland, and many small islands. Northern Ireland is the only part of the UK with a land, benefits are typically indexed for inflation (known as Retail Prices Index In the United Kingdom, the Retail Prices Index or Retail Price Index is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a basket of retail goods and services (RPI)) as required by law for registered pension plans^[4]. Inflation during an employee's retirement affects the purchasing power of the pension; the higher the inflation rate, the lower the purchasing power of a fixed annual pension. This effect can be mitigated by providing annual increases to the pension at the rate of inflation (usually capped, for instance at 5% in any given year). This method is advantageous for the employee since it stabilizes the purchasing power of pensions to some extent.

If the pension plan allows for early retirement, payments are often reduced to recognize that the retirees In common parlance, a pensioner is a person who has retired, and now collects a pension. This is a term typically used in the United Kingdom and Australia where someone of pensionable age may also be referred to as an 'old age pensioner', or OAP. In the United States, the term retiree is more common. In many countries, increasing life expectancy will receive the payouts for longer periods of time. In the US, (under the ERISA The Employee Retirement Income Security Act of 1974 (Pub.L. 93-406, 88 Stat. 829, enacted September 2, 1974) is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was rules), any reduction factor less than or equal to the actuarial Actuarial science is the discipline that applies mathematical and statistical methods to assess risk in the insurance and finance industries. Actuaries are professionals who are qualified in this field through education and experience. In the United States, Canada, the United Kingdom, and several other countries, actuaries must demonstrate their early retirement reduction factor is acceptable.^[5]

Many DB plans include early retirement provisions to encourage employees to retire early, before the attainment of normal retirement age (usually age 65). Companies would rather hire younger employees at lower wages. Some of those provisions come in the form of additional temporary or supplemental benefits, which are payable to a certain age, usually before attaining normal retirement age.^[6]

Funding

Defined benefit plans may be either funded or unfunded.

In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers' contributions and taxes. This method of financing is known as Pay-as-you-go (PAYGO or PAYG)^[7]. The social security system in the USA and most European countries are unfunded, having benefits paid directly out of current taxes and social security contributions. In some countries, such as Germany A region named Germania, inhabited by several Germanic peoples, has been known and documented before AD 100. Beginning in the 10th century, German territories formed a central part of the Holy Roman Empire, which lasted until 1806. During the 16th century, northern Germany became the centre of the Protestant Reformation. As a modern nation-state,, Austria Austria /ˈɒstriə/ or /ˈɔːstriə/ (German: Österreich (help·info)), officially the Republic of Austria (German: Republik Österreich), is a landlocked country of roughly 8.3 million people in Central Europe. It borders Germany and the Czech Republic to the north, Slovakia and Hungary to the east, Slovenia and Italy to the south, and and Sweden Sweden (pronounced /ˈswiːdən/ SWEE-dən, Swedish: Sverige [ˈsvær.jə]), officially the Kingdom of Sweden (Swedish: Konungariket Sverige (help·info)), is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden has land borders with Norway to the west and Finland to the northeast, and water borders with Denmark, Germany and, company run retirement plans are often unfunded.

In a funded plan, contributions from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits. The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Typically, the contributions to be paid are regularly reviewed in a valuation of the plan's assets and liabilities, carried out by an actuary An actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms to ensure that the pension fund will meet future payment obligations. This means that in a defined benefit pension, investment risk and investment rewards are typically assumed by the sponsor/employer and not by the individual. If a plan is not well-funded, the plan sponsor may not have the financial resources to continue funding the plan. In many countries, such as the USA, the UK and Australia Superannuation is a retirement scheme in Australia. It has a compulsory element whereby employers are required by law to pay an additional amount based on a proportion of an employee's salaries and wages (currently 9%) into a complying superannuation fund, which can be accessed when the employee meets one of the conditions of release contained in, most private defined benefit plans are funded, because governments there provide tax incentives to funded plans (in Australia they are mandatory). In the United States, non-church-based private employers must pay an insurance-type premium to the Pension Benefit Guaranty Corporation The Pension Benefit Guaranty Corporation is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep, a government agency whose role is to encourage the continuation and maintenance of voluntary private pension plans and provide timely and uninterrupted payment of pension benefits.

Criticisms

Traditional defined benefit plan designs (because of their typically flat accrual rate and the decreasing time for interest discounting as people get closer to retirement age) tend to exhibit a J-shaped accrual pattern of benefits, where the present value of benefits grows quite slowly early in an employee's career and accelerates significantly in mid-career: in other words it costs more to fund the pension for older employees than for younger ones (an "age bias"). Defined benefit pensions tend to be less portable than defined contribution plans, even if the plan allows a lump sum cash benefit at termination. Most plans, however, pay their benefits as an annuity, so retirees do not bear the risk of low investment returns on contributions or of outliving their retirement income. The open-ended nature of these risks to the employer is the reason given by many employers for switching from defined benefit to defined contribution plans over recent years. The risks to the employer can sometimes be mitigated by discretionary elements in the benefit structure, for instance in the rate of increase granted on accrued pensions, both before and after retirement.

The age bias, reduced portability and open ended risk make defined benefit plans better suited to large employers with less mobile workforces, such as the public sector (which has open-ended support from taxpayers).

Defined benefit plans are sometimes criticized as being paternalistic as they enable employers or plan trustees to make decisions about the type of benefits and family structures and lifestyles of their employees. However they are typically more valuable than defined contribution plans in most circumstances and for most employees (mainly because the employer tends to pay higher contributions than under defined contribution plans), so such criticism is rarely harsh.

The "cost" of a defined benefit plan is not easily calculated, and requires an actuary An actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms or actuarial software. However, even with the best of tools, the cost of a defined benefit plan will always be an estimate based on economic and financial assumptions. These assumptions include the average retirement age and lifespan of the employees, the returns to be earned by the pension plan's investments and any additional taxes or levies, such as those required by the Pension Benefit Guaranty Corporation The Pension Benefit Guaranty Corporation is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep in the U.S. So, for this arrangement, the benefit is relatively secure but the contribution is uncertain even when estimated by a professional.

Examples

Many countries offer state-sponsored retirement benefits, beyond those provided by employers, which are funded by payroll Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' pay, also known as withholding, pay-as-you-earn , or pay-as-you-go (PAYG) tax. The second kind is a tax that is paid from the employer's own funds and that is directly related to employing a worker, or other taxes To tax is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. The United States Social Security In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program system is similar to a defined benefit pension arrangement, albeit one that is constructed differently than a pension offered by a private employer.

Individuals that have worked in the UK and have paid certain levels of national insurance deductions can expect an income from the state pension scheme after their normal retirement. The state pension is currently divided into two parts: the basic state pension, State Second [tier] Pension scheme called S2P. Individuals will qualify for the basic state pension if they have completed sufficient years contribution to their national insurance record. The S2P pension scheme is earnings related and depends on earnings in each year as to how much an individual can expect to receive. It is possible for an individual to forgo the S2P payment from the state, in lieu of a payment made to an appropriate pension scheme of their choice, during their working life. For more details see UK pension provision UK Pension Provision falls into seven major divisions; Basic State Pension, State Second Pension , Occupational Pensions, Stakeholder Pensions, Group Personal Pensions and Personal or Individual Pensions. Personal Accounts, automatic enrolment and the minimum employer contribution will be new policies joining these from 2012.

Defined contribution plans

In a defined contribution plan, contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, sometimes through the purchase of an annuity A life annuity is a financial contract in the form of an insurance product according to which a seller —typically a financial institution such as a life insurance company—makes a series of payments in the future to the buyer (annuitant) in exchange for the immediate payment of a lumpsum (single-payment annuity) or a series of regular payments ( which then provides a regular income. Defined contribution plans have become widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of defined benefit plans in the US has been steadily declining, as more and more employers see pension contributions as a large expense avoidable by disbanding the defined benefit plan and instead offering a defined contribution plan.

Money contributed can either be from employee salary deferral or from employer contributions. The portability of defined contribution pensions is legally no different from the portability of defined benefit plans. However, because of the cost of administration and ease of determining the plan sponsor's liability for defined contribution plans (you don't need to pay an actuary An actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms to calculate the lump sum equivalent that you do for defined benefit plans) in practice, defined contribution plans have become generally portable.

In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer. In addition, participants do not necessarily purchase annuities with their savings upon retirement, and bear the risk of outliving their assets. (In the United Kingdom, for instance, it is a legal requirement to use the bulk of the fund to purchase an annuity.)

The "cost" of a defined contribution plan is readily calculated, but the benefit from a defined contribution plan depends upon the account balance at the time an employee is looking to use the assets. So, for this arrangement, the contribution is known but the benefit is unknown (until calculated).

Despite the fact that the participant in a defined contribution plan typically has control over investment decisions, the plan sponsor retains a significant degree of fiduciary responsibility over investment of plan assets, including the selection of investment options and administrative providers.

Examples

In the United States, the legal definition of a defined contribution plan is a plan providing for an individual account for each participant, and for benefits based solely on the amount contributed to the account, plus or minus income, gains, expenses and losses allocated to the account (see 26 U.S.C. The Internal Revenue Code is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes and statutory excise taxes. The Internal Revenue Code is published as Title 26 of the United States Code (USC), and § 414(i)). Examples of defined contribution plans in the United States include Individual Retirement Accounts An Individual Retirement Arrangement is a retirement plan account that provides some tax advantages for retirement savings in the United States (IRAs) and 401(k) plans In the United States, a 401 retirement savings plan allows a worker to save for retirement and have the savings invested while deferring current income taxes on the saved money and earnings until withdrawal. This type of plan is also known as a "traditional" 401(k). In such plans, the employee is responsible, to one degree or another, for selecting the types of investments Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in form of interest, income, or appreciation of the value of the instrument. It is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined mutual funds A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities . The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective. In the U.S., a fund registered with the to selecting individual stocks The stock or capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business which may fluctuate in or other securities A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities and equity securities, e.g., common stocks; and derivative contracts, such as forwards, futures, options and swaps. The company or other entity issuing the security is called the issuer. A country's regulatory. Most self-directed retirement plans are characterized by certain tax advantages Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. The most obvious examples are Retirement plans, but investments in many state or municipal bonds can also be exempt from certain taxes. Governments establish the tax advantaged status of these, and some provide for a portion of the employee's contributions to be matched by the employer. In exchange, the funds in such plans may not be withdrawn by the investor prior to reaching a certain age—typically the year the employee reaches 59.5 years old-- (with a small number of exceptions) without incurring a substantial penalty.

Defined contribution plans are subject to IRS The Internal Revenue Service is the cartel revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue. The IRS is responsible for collecting taxes and the interpretation and enforcement of the IRC (Internal Revenue limits on how much can be contributed, known as the section 415 limit. In 2009, the total deferral amount, including employee contribution plus employer contribution, was limited to $49,000 or 100% of compensation, whichever is less. The employee-only limit in 2009 is $16,500 with a $5,500 catch-up. These numbers may increase each year and are indexed to compensate for the effects of inflation.

Hybrid and cash balance plans

Hybrid plan designs combine the features of defined benefit and defined contribution plan designs.

A cash balance plan A cash balance plan is a defined benefit retirement plan that maintains hypothetical individual employee accounts like a defined contribution plan. The hypothetical nature of the individual accounts was crucial in the early adoption of such plans because it enabled conversion of traditional plans without declaring a plan termination is a defined benefit plan made by the employer, with the help (some critics say the connivance) of consulting actuaries An actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms (like Kwasha Lipton, whom it is said created the cash balance plan) to appear as if they were defined contribution plans. They have notional balances in hypothetical accounts where, typically, each year the plan administrator will contribute an amount equal to a certain percentage of each participant's salary; a second contribution, called interest credit, is made as well. These are not actual contributions and further discussion is beyond the scope of this entry suffice it to say that there is currently much controversy. In general, they are usually treated as defined benefit plans In economics, a defined benefit pension plan is a type of pension plan in which an employer promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending on investment returns. It is 'defined' in the sense that the formula for for tax, accounting and regulatory purposes. As with defined benefit plans, investment risk in hybrid designs is largely borne by the plan sponsor. As with defined contribution designs, plan benefits are expressed in the terms of a notional account balance, and are usually paid as cash balances upon termination of employment. These features make them more portable than traditional defined benefit plans and perhaps more attractive to a more highly mobile workforce.

Target Benefit plans are defined contribution plans made to match (or look like) defined benefit plans. This would only work if all actuarial assumptions are actually realized.

Contrasting types of retirement plans

Advocates of defined contribution plans point out that each employee has the ability to tailor the investment portfolio to his or her individual needs and financial situation, including the choice of how much to contribute, if anything at all. However, others state that these apparent advantages could also hinder some workers who might not possess the financial savvy to choose the correct investment vehicles or have the discipline to voluntarily contribute money to retirement accounts. This debate parallels the discussion currently going on in the U.S., where many Republican leaders favor transforming the Social Security system, at least in part, to a self-directed investment plan.

Financing

There are various ways in which a pension may be financed.

Defined contribution pensions, by definition, are funded, as the "guarantee" made to employees is that specified (defined) contributions will be made during an individual's working life.

History

United States

Public pensions got their start with various 'promises', informal and legislated, made to veterans of the Revolutionary War and, more extensively, the Civil War. They were expanded greatly, and began to be offered by a number of state and local governments during the early Progressive Era in the late nineteenth century.^{[citation needed]}

Federal civilian pensions were offered under the Civil Service Retirement System (CSRS), formed in 1920. CSRS provided retirement, disability and survivor benefits for most civilian employees in the US Federal government, until the creation of a new Federal agency, the Federal Employees Retirement System (FERS), in 1987.

Pension plans became popular in the United States during World War II, when wage freezes prohibited outright increases in workers' pay. The defined benefit plan had been the most popular and common type of retirement plan in the United States through the 1980s; since that time, defined contribution plans have become the more common type of retirement plan in the United States and many other western countries.

Current challenges

A growing challenge for many nations is population aging. As birth rates drop and life expectancy increases an ever-larger portion of the population is elderly. This leaves fewer workers for each retired person. In almost all developed countries this means that government and public sector pensions could collapse their economies unless pension systems are reformed or taxes are increased. One method of reforming the pension system is to increase the retirement age. Two exceptions are Australia and Canada, where the pension system is forecast to be solvent for the foreseeable future. In Canada, for instance, the annual payments were increased by some 70% in 1998 to achieve this. These two nations also have an advantage from their relative openness to immigration. However, their populations are not growing as fast as the U.S., which supplements a high immigration rate with one of the highest birthrates among Western countries. Thus, the population in the U.S. is not aging to the extent as those in Europe, Australia, or Canada.

Another growing challenge is the recent trend of states and businesses in the United States purposely under-funding their pension schemes in order to push the costs onto the federal government. For example, in 2009, the majority of states have unfunded pension liabilities exceeding all reported state debt. Bradley Belt, former executive director of the PBGC (the Pension Benefit Guaranty Corporation, the federal agency that insures private-sector defined-benefit pension plans in the event of bankruptcy), testified before a congressional hearing in October 2004, “I am particularly concerned with the temptation, and indeed, growing tendency, to use the pension insurance fund as a means to obtain an interest-free and risk-free loan to enable companies to restructure. Unfortunately, the current calculation appears to be that shifting pension liabilities onto other premium payers or potentially taxpayers is the path of least resistance rather than a last resort.”

Challenges have further been increased by the credit crunch. Total funding of US pension plans fell by $303bn in 2008, going from a $86bn surplus at the end of 2007 to a $217bn deficit at the end of 2008.^[8]

Pension systems in various countries

• Australia:
  • Private occupational pensions or Superannuation
  • Public pensions
• Canada:
  • Canada Pension Plan
  • Old Age Security
  • Quebec Pension Plan
  • Registered Retirement Savings Plan
  • Saskatchewan Pension Plan
• China:
  • Hong Kong
• Finland
• India
• Malaysia
• Netherlands
• New Zealand
• Singapore
• Sweden
• Turkey
• United Kingdom:
  • Pensions (general)
  • Self-invested personal pensions
• United States:
  • Public employee pensions
  • Retirement plans
  • Social Security (actually social insurance, shares some aspects of pensions

Market structure

The market for pension fund investments is still centred around Anglo-Saxon economies. Japan and the EU are conspicuous by absence. As of 2005 the U.S. was the largest market for pension fund investments followed by the UK.

Pension reforms have gained pace worldwide in recent years and funded arrangements are likely to play an increasingly important role in delivering retirement income security and also affect securities markets in future years.

See also

• 401(k) and Roth 401(k)

• Bankruptcy code
• Elderly care
• ERISA
• Financial advisor and Fee-only financial advisor
• Generational accounting
• Individual Pension Plan (IPP)
• Individual Retirement Account (IRA)
• Life annuity
• Pension Benefit Guaranty Corporation
• Pensions crisis
• Pension fund
• Pension system
• Pensioner
• Provident Fund
• Public debt
• Universities Superannuation Scheme

References

1. ^ Princeton WordNet, http://wordnetweb.princeton.edu/perl/webwn?s=pension, viewed 24 December, 2008
2. ^ Princeton WordNet, http://wordnetweb.princeton.edu/perl/webwn?s=superannuation, viewed 24 December, 2008
3. ^ Private Pensions/Les pensions privées
4. ^ The Pensions Advisory Service
5. ^ Early Retirement Provisions in Defined Benefit Pension Plans. Ann C. Foster http://www.bls.gov/opub/cwc/archive/winter1996art3.pdf
6. ^ Qualified Domestic Relations Order Handbook By Gary A. Shulman p.199-200 Published by: Aspen Publishers Online, 1999 ISBN 0735506655, ISBN 9780735506657
7. ^ "Unfunded Pension Plans" OECD Glossary of Statistical Terms (retrieved 26 January 2009).
8. ^ Largest U.S. pension plans' assets fall $217 billion short, http://www.usatoday.com/money/perfi/retirement/2009-03-11-pension-plan-assets-short_N.htm, USA Today, citing a report by Watson Wyatt, 10 March 2009.

External links

• "Doing it Offshore" - an independent guide to pension planning offshore
• The Canadian Museum of Civilisation - The History of Canada's Public Pensions
• Pension Benefit Guaranty Corporation (PBGC) - A United States government organisation
• A Global Perspective on Aging and Pensions, Allianz Knowledge, February 2008
• Administration on Aging (Pension Counseling ) - A United States government organisation
• Pensions and Capital Stewardship Project at the Labour and Worklife Program, Harvard Law School - A United States' organisation.
• "Actuarially Speaking: A Plain Language Summary of Actuarial Methods and Practices for Public Employee Pension and Other Post-Employment Benefits," from the California Research Bureau (CRB) at the California State Library
• Creating a Retirement Plan Articles on MSN Money
• Provisions on pensions for migrant workers within the European Union
• Is your pension secure?, Consumer Reports
• How to plan for and decide on a pension impartial advice from BBC raw

Categories: Employment compensation | Financial services | Investment | Retirement | Personal finance | Pension

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