Question

Many people unfortunately don't think about retirement and pension funds until its time and then its usually too late. Briefly discuss what you think about pension funds and the role that they serve individuals or corporations. Pension fund companies are also heavily invested into the capital markets. What role do they serve individuals or companies and provide one advantage and disadvantage.

Answer 1

• Pension funds are collective investment undertakings (UCITs) that manage employee savings and retirement. Their primary objective is to provide pensioners who have reached retirement age with income in the form of a lifetime pension or capital. Unlike public pension funds managed on a pay-as-you-go basis, pension funds are managed by capitalization.
• When members reach retirement age, they are provided with either an annuity or a capital paid by the fund. At the core of pension fund operations are three types of activity: premium collection, investment of sums collected, benefits paid.
• Basically, Pension funds are investment pools that pay for workers' retirements. Funds are paid for by either employee, employers, or both. Corporations and all levels of government provide pensions.

There are two types of pension funds -

1. Defined Benefit Pension Fund - The first, the defined benefit pension fund, is what most people think of when they say "pensions." The retiree receives the same guaranteed amount.

2. The Defined Contribution Plan - The second, the defined contribution plan, is the familiar 401(k) plan. The payout depends on how well the fund does.

ROLES of Pension Funds:-

• It has been shown that pension funds have been able to fulfill a number of roles, directly or indirectly, more efficiently than other types of the institution or than direct holdings. In this sense, pension funds may be seen as more efficient financial institutions that are tending to displace existing arrangements. Also of notice is the growing trend towards dependency on pension funds which proves that these funds tend to complement capital markets and act as substitutes for banks.
• The Pension Funds would create an investment model that is: • sustainable • secure • rational, and • desirable. As a result, it would benefit the pensioner and society at large and give benefits for long term investing.
• Those who invest in Pension Funds would, of course, want a return. That is what pension saving is all about while also considering the Tax reliefs and other incentives offered by the government & tax authorities.
• Pension contributions can be invested in the building of new public infrastructure projects such as • schools and universities • hospitals and other health facilities • transport systems (including railways, trams and bus networks) • social housing • sustainable energy systems.

ROLE of PENSION FUND COMPANIES -

• The company is responsible for putting aside enough money to pay for this benefit. This can be a great feature because it creates a safe retirement income for both you and your employees.
• Receiving of Subscribers funds from Trustee Bank for investments as per subscriber preferences.
• Investing the funds in securities prescribed in the investment guidelines issued by Authority and Investment Policy approved by the Board of Pension Fund.
• Constitution of Investment Committee and Risk Management Committee.
• Construction and review of Scheme Portfolio in compliance with prudential exposure norms and scheme objectives.
• Maintenance of proper books of accounts for the Schemes managed by the Pension Fund.
• Declaration of Scheme Net Assets Value at the end of each working day and communicating to CRA for Unitization in subscriber’s PRAN.
• Periodic reporting of its operational activities to NPS Trust.

Few Pension Funds registered by Pension Fund Regulatory and Development Authority in India:

A. Pension Funds (PFs) for Government Sector

1. LIC Pension Fund Ltd.
2. SBI Pension Funds Pvt. Ltd.
3. UTI Retirement Solutions Ltd.

B. Pension Funds (PFs) for Private Sector

1. HDFC Pension Management Co. Ltd.
2. ICICI Prudential Pension Fund Management Co. Ltd.
3. Kotak Mahindra Pension Fund Ltd.

The advantage of it is the Guaranteed Payments, i.e. The retirement payout from a pension fund is guaranteed. It is not based on the stock market.

The disadvantage of it is that it can also be costly for the companies business.