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Pension funds (Current issues (Key issue: Longevity risk (Increase in life…

- - - - global aging and life expectancy increases lead to deepening pension deficits and growing asset liability management gap
- - - - Any pension plan set up by employers groups or individuals, funds administered by a private crop
      - Increasingly dominated by defined contribution plans
      - Types of private pension plans
        
        401k and 403b: eomplyer sponsorted plans that supplie,ent a firm's basic reitrement plan
        
        individual retirement accounts IRA's and Roth IRAs
        
        Keogh accounts (for self employed and SME employees)
    - - State or local govt pension funds
        
        set up for state or local govt employees, pay as you go basis (workers that contribute today pays benefits to current recipients)
        
        state and local pension funds held most of their assets in corporate equities
      - fed govt pension funds
        
        2 types
        
        for fed govt employees, civil service employees, military and railroad employees not covered by Federal Old Age and Disability Insurance Program/ social security
        
        Social Security
        
        pay as you go
        
        projected number of workers is falling while projected number of retirees is increasing which will cause problems in years to come if not corrected
        
        relatively low risk, low return treasury securities
- - - - a plan where the sponsor promises the employee a specific benefit when they retire
      - place burden on employers to properly fund the pension payouts
    - - a plan where a set amount is invested for retirement, but the benefit payout is uncertain
- - - - pension benefits are legitimate part of collective bargaining
      - number of plans increase from this as unions negotiated for such plans
    - - does not mandate that employers establish pension funds for their employees
      - established guideline for funding: contributions to pension funds must be sufficient to cover all annual costs and expenses and to fund any unfunded historical liabilities over a 30 year period, any new underfunding arising from low investment returns have to be funded over a 15 year period
      - allowed plan credit transfer with employees
      - established vesting requirements to gain plan benefits
      - assinged regulatory oversight to department of labour
      - ERISA also established the Pension Benefit Guarantee Corporation to insure pension benefits if an underfunded pension plan is unable to meet its obligations
        
        accounting makes it difficult to assess funding status of a plan
        
        may be in trouble as plans appear underfunded
    - - enjoy preferential tax treatment
      - keogh plans are simiar plans for self employed individuals
      - Simple IRAs are simplified retirement plans for small businesses
- - - - Mandatory
        
        contribute 5% of wage into MPF, contributions are matched by employer (totalling 10%)
      - Members' choice
        
        employee can choose where contributions are invested
      - Contributions not available until retirement
      - portable plan
        
        when changing jobs, employee can transfer to new employer plan or to own MPF
      - Trustee set up
        
        MPF must be in a trust structure to ensure max protection of scheme members' assets
    - - structure of MPF: employer selects master trust, in which one part of the constituent fund goes to the capital preservation product, remaining constituent funds can be chosen by members which will be polled into an apprived poolied investment fund
    - - employees are allowed to transfer their accrued benefits or not to make any change by retaining the accrued benefits in the MPF scheme they are currently enrolled in
    - - introduction of choice of withdrawal by installments instead of lump sum
        
        withdraw MPF benefits by installments
        
        withdraw all their MPF benefits in a lump sum
        
        retain all their benefits in an account for continuous investment
    - - to address the problems of high fees and difficulty in making choices, each trustee is required to provide a Default Investment Strategy
      - MPF members who don't select any options will by default contribute into the DIS
      - 2 globally diversified funds: core accumulation fund and Age 65 plus fund
        
        by principal of age derisking, as the when the participant reaches 50, the MPF benefits in the core accumulation fund will be gradually switches to the age 65 plus fund everyyear until it's all in