6:50 pm - Sunday July 23, 2017

Demystifying some elements of Pensions and Pension Plans

Pension is a regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed in the work life period of the person.

Typically pension fund system has four basic characteristics and they are

  • Contributions
  • Benefits
  • Financial regime
  • Management

Pension and pension schemes are attracting focused attention these days due to the recent financial markets melt down and also due to certain regulatory initiatives being contemplated.

Pension systems all over the world move towards ‘Pay As You Go’ – a move away from conventional government’s ‘Gratis’ approach

Private Pension Operators and even Governments in select countries (India, an example) operate on non defined contributions to well defined ones and from known benefits to unknown ones thus transforming financial regime into individual schemes of capitalisation.

Naturally this will cast a higher responsibility on individuals away from governments who should take more responsibility on their retirement income

The functional architectures of different of forms of pension funds administration are discussed below.

Defined Benefit Plans

  • Benefit Plan Administration
  • Account Management
  • Contribution Management
  •  Transaction Management
  • Calculations
  • Claims
  • Reports
  • Analytics
  • MIS
  • Audit Services
  • Withdrawals
  • Payments
  • Disbursements

Cash Balanced Plans

  • Cheque processing
  • Annuities
  • Lump Sum Distribution
  • Direct Deposit
  • Tax Withholding

Pension Trustee Services

  • Custody
  • Direct Investment Management
  • Portfolios
  • Dividend Collection
  • Corporate Actions
  • Reporting

Profit Sharing Plans

  • Traditional Profit Sharing Plans
  • Age Weighted
  • New Comparability
  • Cross tested

One can list out the typical issues in pension and pension funds management as under

  • Not enough money in pension funds to guarantee a comfortable retirement for today’s working population
  • Some time many employees putting money aside for their old age may well find that their retirement income falls far short of what they had hoped
  • Medical advances over the last few decades have greatly prolonged life span, forcing the pensions industry to support a greater number of pensioners for longer periods
  • In some geographies, the dwindling stock market returns have forced the pension funds to a situation where ‘assets less liabilities more’ kind of situation
  • Lower returns on their investments are forcing the pension funds to suspend once generous and popular schemes which guarantee employees a fixed proportion of their final salaries on retirement
  • A good number of pension funds have now set up defined contribution or money purchase schemes, which do not guarantee the final pension sum and are therefore less risky for pension funds
  • Dividends play an important part in the long term health of pension schemes and any tax on them increases the possibility that the scheme will not have sufficient assets to meet liabilities
  • The environment – longer life span, dwindling stock market returns, tax on dividends – force the funds to generate more money to ensure a given level of retirement income

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