Question

In a comprehensive fashion, present the various components of the private sector's Retirement or Pension Program. Explain the extent of its coverage and its membership. Explain how it is financed, how it pays benefits to its members. Discuss its solvency. Provide your recommendations for long-term sustainability.

Answer 1

There are mainly 2 types of pension plan.
1. Defined benefit plan - In this private pension program, employee is entitled to get benefit after retirement till his or her death irrespective of the employees contribution. Means a pre defined fixed amount has been paid after retirement which gives assurity of safety till death.
2. Defined contribution plan which is also known as 401(k) plan under which the amount of pension to be received after retirement depends upon the contribution made by the employer, under this employee's contributed amount may get over or it is not assured that employee will get benefit till his or her death.

Type 1 is financed by the employer as it gives assurity to the employee while type 2 is own financed plan i.e. depending upon the contribution made.

Both of the plan gives benefit after retirement but type 1 gives assurance of lifetime safety.

With the decrease in the interest rates the pension scheme also gives lower returns because of which pension scheme's solvency and long term sustainability is reduced year by year as per the statistical data.
For long term sustainability pensions are giving assured and safe fixed returns so that solvency can be maintained and safety and security measures gets more consideration.

For the purpose of safe and secured future pension plans must be more defined benefit plan focused and it is must for the safe investment as well