A Beginner’s Guide to Pension Fund Framework

When we think about large institutional investors with a careful look into the governance, the first name that comes to our mind is Pension Fund. In developing countries pension fund is considered to be one of the biggest surplus units that provide funds to the needy deficit units on a longer-term basis. But during the 1930’s or during 1040’s – the concept of the pension fund was totally non-existent. In a welfare state whereby the state takes care of old-age needs, pensioners should not think about saving during their early age. With the advancement in medical science, the average lifespan of people rose significantly during the last century and social security allocation to this aging population has suddenly become burdensome for most of the welfare states. Under a pension fund framework, it is the to-be retirees who fund their post-retirement life through dedicated savings during their earning days.

Employees who share a common bond generally participate in a pension fund whereby they save money for their post-career lifetime. Under the pension fund framework, a fund manager manages the pensioner’s money and pensioners can determine their preferred asset classes for investment). In a defined benefit plan, the future value of the pension is generally pre-determined; on the other hand in a defined contribution plan, the contributions from the pension fund members are pre-specified. But the benefits coming from the funds are not pre-determined under the defined contribution plan.

It is really costly to manage a defined benefit plan from the employer’s point of view and that is why most of the pension funds formed across the globe in recent years have been defined contribution plans. States are becoming frustrated over their pension allocations and social security payments in recent years as the aging population is on the surge. That is why even the small private employers have been forced to become a part of a pension plan. Even the self-employed are supposed to become a member of a pension plan. Since small offices or self-employed cannot hire their own fund manager, it is recommended that they become a part of an established pension fund. Pension fund’s investment is discretionary at the employee’s end. Most of the time pension package allows equal contribution from the employer. There are normally trustee boards to check out the standings of the fund after a specific time period.    

The pension fund can easily afford to have a longer-term focus since the money accumulated will be called off only after the retirement. Since the fund has a longer-term focus, the fund usually tries to make sure that good corporate governance is practiced wherever it invests.

Date: 27 September 2017

Blog Writer: Hussain Ahmed Enamul Huda