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Pension Fund Operations - Coggle Diagram
Pension Fund Operations
Types of Pension Plans
Defined- Benefits Plans
-Benefits are pre-determined based on salary and years of employment
-Future obligations and required contributions are uncertain due to variable investment returns.
Defined - Contribution Plans
-Benefits depend on contributions and investment performance
-Employer contributions may include matching a portion of employee contributions
-Predictable contributions but uncertain benefits
Plan Comparison
Defined - Benefit:
Fixed retirement income; no investment responsibility for employees
Defined - Contribution:
Investment decisions by employees; benefits vary with market performance.
Defined - contribution plans are more common, but defined- benefit plan hold more ssets
Pension Fund Participation
in Financial Markets
-Role in Economic Growth:
Large investments in stocks, bonds, and other financial instruments.
-Governance:
Influence corporate policies through substansial investments
-Markets used:
Stock, bond, money, mortgage, futures, and option markets.
Regulation of Private Pension Plans
ERISA ( Employee Retirement Income Security Act)
-Sets guideline for defined-contribution plans.
-Ensures investments are managed prudently.
-Allows employees to transfer vested amounts between employers or to IRAs.
Pension Benefit Guaranty Corporation ( PBGC):
-Insures defined-benefit plans for ~ 34 million Americans
-Requires companies to fully fund underfunded pensions within 7 years (Pension Protection Act of 2006)
Underfunded Pension Plans
Private Plans
-Underfunding due to overly optimistic return assumptions
Public Plans
-Causes: Political mtivations, insufficient funding, generous benefits
Solutions:
-Issue bonds or adopt aggressive investment strategies
-Revise contribution rates or benefits
-Increase taxes or reduce services
-Shift to defined contribution plans to avoid future shortfalls.
Corruption in Defined Benefit Plans
Issues:
-Bribery of trustees
-Favoritism or excessive benefits
-Incompetent trustees appointed for political reasons
Pension Fund Management
Portfolio Guidelines:
-Allocation percentages for stocks, bonds, real estate, and other assets
-Minimum quality ratings for bonds and industry exposure limits
-Desired return rates and acceptable risk levels
Investment Strategies:
-Passive Management:
Indexed mutual funds or bond index portfolios
-Matched Funding:
Aligning cash flow with planned outflows
-Projective Funding:
Leveraging expected market and interest rate trends
Performance of Pension Funds
Stock Portfolios:
-Affected by market conditions and management quality
Bond Portfolios:
-Inversely related to changes in risk-free rates and risk premiums.
Evaluations:
-Benchmarks: Compare performance with passive strategies
-Weak market conditions expose some portfolios to high risks