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| A '''pension''' (also known as '''superannuation''') is a ] intended to provide a person with a secure income for life. Although a ] may provide a pension, the common use of the term is to describe the payments a person receives upon ]. | A '''pension''' (also known as '''superannuation''') is a ] intended to provide a person with a secure income for life. Although a ] may provide a pension, the common use of the term is to describe the payments a person receives upon ]. | ||
| Pensions have traditionally been payments made in the form of a guaranteed ] to a retired or disabled employee, or to a deceased employee's spouse, children, or other beneficiary. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension |
Pensions have traditionally been payments made in the form of a guaranteed ] to a retired or disabled employee, or to a deceased employee's spouse, children, or other beneficiary. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labor unions, the government, or other organizations may also sponsor pension provision. | ||
| ==Types of |
==Types of pensions== | ||
| A pension |
A pension that provides a guaranteed benefit is commonly called a defined benefit pension. A defined benefit typically employs a formula based on the employee's pay, years of employment and age at retirement to calculate the guaranteed payment. The ] system is an example of a defined benefit pension arrangement. | ||
| Defined benefit |
Defined benefit used to dominate pension provision in both the private and public sector. However, a guaranteed, or "defined" benefit is no longer the universal pension payment model. Instead, the benefit may be based solely on the value of the accumulated assets in a pension fund at the time payment is to begin. | ||
| A pension |
A pension of this kind is commonly called a defined contribution plan. In a defined contribution pension, the employer, the employee or both make contributions into an individual investment fund. This fund is invested in underlying investments, such as company shares, and will move in line with the return on these investments. At retirement, and occasionally in other circumstances, the individual draws income from the fund. Purchasing an annuity, which provides a secure income for life, from an insurance company, often does this. | ||
| In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer. In the United States, the most common example of a defined contribution employer pension |
In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer. In the United States, the most common example of a defined contribution employer pension is the ]. As an incentive to encourage workers to contribute more to defined contribution plans, some governments have instituted significant ]s for doing so. The widespread use of defined contribution plans helps to alleviate the burden on state-sponsored pensions, such as Social Security. | ||
| ==Financing== | ==Financing== | ||
| There are various ways in which a pension |
There are various ways in which a pension may be financed. In a '''funded''' pension, contributions are paid into a fund during an individual's working life. The fund will be invested in assets, such as stocks, bonds and property, and grow in line with the return on these assets. | ||
| In an '''unfunded''' |
In an '''unfunded''' 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''. It has been suggested that this model bears a disturbing resemblance to a ]. | ||
| In a funded defined benefit arrangement, if the employee's contributions and accumulated earnings are not sufficient to pay the guaranteed or "defined" benefit, the sponsor must cover the shortfall with additional contributions. Sponsors employ ] to calculate the contributions that need to be made 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. | In a funded defined benefit arrangement, if the employee's contributions and accumulated earnings are not sufficient to pay the guaranteed or "defined" benefit, the sponsor must cover the shortfall with additional contributions. Sponsors employ ] to calculate the contributions that need to be made 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. | ||
Revision as of 05:25, 30 September 2004
A pension (also known as superannuation) is a retirement plan intended to provide a person with a secure income for life. Although a lottery may provide a pension, the common use of the term is to describe the payments a person receives upon retirement.
Pensions have traditionally been payments made in the form of a guaranteed annuity to a retired or disabled employee, or to a deceased employee's spouse, children, or other beneficiary. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labor unions, the government, or other organizations may also sponsor pension provision.
Types of pensions
A pension that provides a guaranteed benefit is commonly called a defined benefit pension. A defined benefit typically employs a formula based on the employee's pay, years of employment and age at retirement to calculate the guaranteed payment. The United States Social Security system is an example of a defined benefit pension arrangement.
Defined benefit used to dominate pension provision in both the private and public sector. However, a guaranteed, or "defined" benefit is no longer the universal pension payment model. Instead, the benefit may be based solely on the value of the accumulated assets in a pension fund at the time payment is to begin.
A pension of this kind is commonly called a defined contribution plan. In a defined contribution pension, the employer, the employee or both make contributions into an individual investment fund. This fund is invested in underlying investments, such as company shares, and will move in line with the return on these investments. At retirement, and occasionally in other circumstances, the individual draws income from the fund. Purchasing an annuity, which provides a secure income for life, from an insurance company, often does this.
In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer. In the United States, the most common example of a defined contribution employer pension is the 401(k) Plan. As an incentive to encourage workers to contribute more to defined contribution plans, some governments have instituted significant tax advantages for doing so. The widespread use of defined contribution plans helps to alleviate the burden on state-sponsored pensions, such as Social Security.
Financing
There are various ways in which a pension may be financed. In a funded pension, contributions are paid into a fund during an individual's working life. The fund will be invested in assets, such as stocks, bonds and property, and grow in line with the return on these assets.
In an unfunded 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. It has been suggested that this model bears a disturbing resemblance to a Ponzi scheme.
In a funded defined benefit arrangement, if the employee's contributions and accumulated earnings are not sufficient to pay the guaranteed or "defined" benefit, the sponsor must cover the shortfall with additional contributions. Sponsors employ actuaries to calculate the contributions that need to be made 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.