A pension (, from
Latin
Latin (, or , ) is a classical language belonging to the Italic branch of the Indo-European languages. Latin was originally a dialect spoken in the lower Tiber area (then known as Latium) around present-day Rome, but through the power of the ...
''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's
retirement
Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload.
Many people choose to retire when they are elderly or incapable of doing their j ...
from work in the form of periodic payments. A pension may be a "
defined benefit plan
Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age, ...
", where a fixed sum is paid regularly to a person, or a "
defined contribution plan
A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these a ...
", under which a fixed sum is invested that then becomes available at retirement age.
Pensions should not be confused with
severance pay
Severance may refer to:
Arts and entertainment
* ''Severance'' (film), a 2006 British horror film
* ''Severance'' (novel), a 2018 novel by Ling Ma
*''Severance'', a 2006 short-story collection by Robert Olen Butler
* ''Severance'' (TV series), a ...
; the former is usually paid in regular amounts for life after retirement, while the latter is typically paid as a fixed amount after involuntary termination of employment before retirement.
The terms "retirement plan" and "superannuation" tend to refer to a pension granted upon retirement of the individual. Retirement plans may be set up by employers, insurance companies, the government, or other institutions such as employer associations or trade unions. Called ''retirement plans'' in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, they are commonly known as ''pension schemes'' in the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
and
Ireland
Ireland ( ; ga, Éire ; Ulster Scots dialect, Ulster-Scots: ) is an island in the Atlantic Ocean, North Atlantic Ocean, in Northwestern Europe, north-western Europe. It is separated from Great Britain to its east by the North Channel (Grea ...
and ''superannuation plans'' (or ''super'') in
Australia
Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
and
New Zealand
New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island count ...
. Retirement pensions are typically in the form of a guaranteed
life annuity
A life annuity is an annuity, or series of payments at fixed intervals, paid while the purchaser (or annuitant) is alive. The majority of life annuities are insurance products sold or issued by life insurance companies however substantial case l ...
, thus insuring against the
risk of longevity.
A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension.
Labor union
A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits ( ...
s, the government, or other organizations may also fund pensions. Occupational pensions are a form of
deferred compensation Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a later date after which the income was earned. Examples of deferred compensation include pensions, retirement plans, and employee stock options. The p ...
, usually advantageous to employee and employer for
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
reasons. Many pensions also contain an additional
insurance
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
aspect, since they often will pay benefits to survivors or disabled beneficiaries. Other vehicles (certain
lottery
A lottery is a form of gambling that involves the drawing of numbers at random for a prize. Some governments outlaw lotteries, while others endorse it to the extent of organizing a national or state lottery. It is common to find some degree of ...
payouts, for example, or an
annuity
In investment, an annuity is a series of payments made at equal intervals.Kellison, Stephen G. (1970). ''The Theory of Interest''. Homewood, Illinois: Richard D. Irwin, Inc. p. 45 Examples of annuities are regular deposits to a savings account, mo ...
) may provide a similar stream of payments.
The common use of the term ''pension'' is to describe the payments a person receives upon retirement, usually under pre-determined legal or contractual terms. A recipient of a retirement pension is known as a ''
pensioner
A pensioner is a person who receives a pension, most commonly because of retirement from the workforce. This is a term typically used in the United Kingdom (along with OAP, initialism of old-age pensioner), Ireland and Australia where someone of p ...
'' or ''retiree''.
Types
Employment-based pensions
A retirement plan is an arrangement to provide people with an income during retirement when they are no longer earning a steady income from employment. Often retirement plans require both the employer and employee to contribute money to a fund during their employment in order to receive defined benefits upon retirement. It is a tax deferred savings vehicle that allows for the tax-free accumulation of a fund for later use as retirement income. Funding can be provided in other ways, such as from labor unions, government agencies, or self-funded schemes. Pension plans are therefore a form of "deferred compensation". A
SSAS is a type of employment-based Pension in the UK. The
401(k)
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their ...
is the iconic self-funded retirement plan that many Americans rely on for much of their retirement income; these sometimes include money from an employer, but are usually mostly or entirely funded by the individual using an elaborate scheme where money from the employee's paycheck is withheld, at their direction, to be contributed by their employer to the employee's plan. This money can be tax-deferred or not, depending on the exact nature of the plan.
Some countries also grant pensions to military veterans. Military pensions are overseen by the government; an example of a standing agency is the
United States Department of Veterans Affairs
The United States Department of Veterans Affairs (VA) is a Cabinet-level executive branch department of the federal government charged with providing life-long healthcare services to eligible military veterans at the 170 VA medical centers a ...
. ''
Ad hoc
Ad hoc is a Latin phrase meaning literally 'to this'. In English, it typically signifies a solution for a specific purpose, problem, or task rather than a generalized solution adaptable to collateral instances. (Compare with ''a priori''.)
Com ...
'' committees may also be formed to investigate specific tasks, such as the U.S.
Commission on Veterans' Pensions The U.S. President’s Commission on Veterans’ Pensions, commonly known as the Bradley Commission after its chairman General Omar N. Bradley (commonly known as the "Bradley Commission") in 1955–56. Pensions may extend past the death of the veteran himself, continuing to be paid to the widow.
Social and state pensions
Many countries have created funds for their citizens and residents to provide income when they retire (or in some cases become disabled). Typically this requires payments throughout the citizen's working life in order to qualify for benefits later on. A basic state pension is a "contribution based" benefit, and depends on an individual's contribution history. For examples, see
National Insurance
National Insurance (NI) is a fundamental component of the welfare state in the United Kingdom. It acts as a form of social security, since payment of NI contributions establishes entitlement to certain state benefits for workers and their famil ...
in the UK, or
Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
in the United States of America.
Many countries have also put in place a "
social pension
A social pension (or non-contributory pension) is a stream of payments from state to an individual that starts when someone retires and continues in payment until death. It is a part of a pension system of most developed countries, specifically the ...
". These are regular, tax-funded non-contributory cash transfers paid to older people. Over 80 countries have social pensions. Some are universal benefits, given to all older people regardless of income, assets or employment record. Examples of universal pensions include
New Zealand
New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island count ...
Superannuation and the Basic Retirement Pension of
Mauritius
Mauritius ( ; french: Maurice, link=no ; mfe, label=Mauritian Creole, Moris ), officially the Republic of Mauritius, is an island nation in the Indian Ocean about off the southeast coast of the African continent, east of Madagascar. It incl ...
. Most social pensions, though, are means-tested, such as
Supplemental Security Income
Supplemental Security Income (SSI) is a means-tested program that provides cash payments to disabled children, disabled adults, and individuals aged 65 or older who are citizens or nationals of the United States. SSI was created by the Social Se ...
in the United States of America or the "older person's grant" in
South Africa
South Africa, officially the Republic of South Africa (RSA), is the southernmost country in Africa. It is bounded to the south by of coastline that stretch along the South Atlantic and Indian Oceans; to the north by the neighbouring countri ...
.
Disability pensions
Some pension plans will provide for members in the event they suffer a
disability
Disability is the experience of any condition that makes it more difficult for a person to do certain activities or have equitable access within a given society. Disabilities may be Cognitive disability, cognitive, Developmental disability, dev ...
. This may take the form of early entry into a retirement plan for a disabled member below the normal retirement age.
Benefits
Retirement plans may be classified as ''defined benefit'', ''defined contribution'' or ''defined ambition'' / ''target benefit'' according to how the benefits are determined. A defined benefit plan guarantees a certain payout at retirement, according to a fixed formula which usually depends on the member's salary and the number of years' membership in the plan. A defined contribution plan will provide a payout at retirement that is dependent upon the amount of money contributed and the performance of the investment vehicles utilized. Hence, with a defined contribution plan the risk and responsibility lies with the employee that the funding will be sufficient through retirement, whereas with the defined benefit plan the risk and responsibility lies with the employer or plan managers.
Some types of retirement plans, such as ''cash balance'' plans, combine features of both defined benefit and defined contribution plans. They are often referred to as ''hybrid'' plans. Such plan designs have become increasingly popular in the US since the 1990s. Examples include Cash Balance and Pension Equity plans.
Defined benefit plans
A Defined Benefit (DB) pension plan is a plan in which workers accrue pension rights during their time at a firm and upon retirement the firm pays them a benefit that is a function of that worker's tenure at the firm and of their earnings. In other words, a DB plan is a plan in which the benefit on retirement is determined by a set formula, rather than depending on investment returns. Government pensions such as
Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
in the United States are a type of defined benefit pension plan. Traditionally, defined benefit plans for employers have been administered by institutions which exist specifically for that purpose, by large businesses, or, for
government
A government is the system or group of people governing an organized community, generally a state.
In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...
workers, by the government itself. A traditional form of defined benefit plan is the ''final salary'' plan, under which the pension paid is equal to the number of years worked, multiplied by the member's salary at retirement, multiplied by a factor known as the ''accrual rate''. The final accrued amount is available as a monthly pension or a lump sum, but usually monthly.
The benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors. A simple example is a Dollars Times Service plan design that provides a certain amount per month based on the time an employee works for a company. For example, a plan offering $100 a month per year of service would provide $3,000 per month to a retiree with 30 years of service. While this type of plan is popular among unionized workers, Final Average Pay (FAP) remains the most common type of defined benefit plan offered in the United States. In FAP plans, the average salary over the final years of an employee's career determines the benefit amount.
Averaging salary over a number of years means that the calculation is averaging different dollars. For example, if salary is averaged over five years, and retirement is in 2006, then salary in 2001 dollars is averaged with salary in 2002 dollars, etc., with 2001 dollars being worth more than the dollars of succeeding years. The pension is then paid in first year of retirement dollars, in this example 2006 dollars, with the lowest value of any dollars in the calculation. Thus inflation in the salary averaging years has a considerable impact on purchasing power and cost, both being reduced equally by inflation.
This effect of inflation can be eliminated by converting salaries in the averaging years to first year of retirement dollars, and then averaging.
In the US, specifies a defined benefit plan to be any pension plan that is not a defined contribution plan (see below) where a defined contribution plan is any plan with individual accounts. A traditional pension plan that ''defines'' a ''benefit'' for an employee upon that employee's retirement is a defined benefit plan. In the U.S., corporate defined benefit plans, along with many other types of defined benefit plans, are governed by the Employee Retirement Income Security Act of 1974 (ERISA).
In the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
, benefits are typically indexed for inflation (known as
Retail Prices Index
In the United Kingdom, the Retail Prices Index or Retail Price Index (RPI) is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a representative sample of retail final good, goods ...
(RPI)) as required by law for registered pension plans. Inflation during an employee's retirement affects the purchasing power of the pension; the higher the inflation rate, the lower the purchasing power of a fixed annual pension. This effect can be mitigated by providing annual increases to the pension at the rate of inflation (usually capped, for instance at 5% in any given year). This method is advantageous for the employee since it stabilizes the purchasing power of pensions to some extent.
If the pension plan allows for early retirement, payments are often reduced to recognize that the
retiree
A pensioner is a person who receives a pension, most commonly because of retirement from the workforce. This is a term typically used in the United Kingdom (along with OAP, initialism of old-age pensioner), Ireland and Australia where someone of p ...
s will receive the payouts for longer periods of time. In the United States, under the
Employee Retirement Income Security Act of 1974
The Employee Retirement Income Security Act of 1974 (ERISA) (, codified in part at ) is a U.S. federal tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax eff ...
, any reduction factor less than or equal to the
actuarial early retirement reduction factor is acceptable.
Many DB plans include early retirement provisions to encourage employees to retire early, before the attainment of normal retirement age (usually age 65). Companies would rather hire younger employees at lower wages. Some of those provisions come in the form of additional ''temporary'' or ''supplemental benefits'', which are payable to a certain age, usually before attaining normal retirement age.
Due to changes in pensions over the years, many pension systems, including those in
Alabama
(We dare defend our rights)
, anthem = "Alabama (state song), Alabama"
, image_map = Alabama in United States.svg
, seat = Montgomery, Alabama, Montgomery
, LargestCity = Huntsville, Alabama, Huntsville
, LargestCounty = Baldwin County, Al ...
,
California
California is a U.S. state, state in the Western United States, located along the West Coast of the United States, Pacific Coast. With nearly 39.2million residents across a total area of approximately , it is the List of states and territori ...
,
Indiana
Indiana () is a U.S. state in the Midwestern United States. It is the 38th-largest by area and the 17th-most populous of the 50 States. Its capital and largest city is Indianapolis. Indiana was admitted to the United States as the 19th s ...
, and
New York
New York most commonly refers to:
* New York City, the most populous city in the United States, located in the state of New York
* New York (state), a state in the northeastern United States
New York may also refer to:
Film and television
* '' ...
, have shifted to a tiered system. For a simplified example, suppose there are three employees that pay into a state pension system: Sam, Veronica, and Jessica. The state pension system has three tiers: Tier I, Tier II, and Tier III. These three tiers are based on the employee's hire date (i.e. Tier I covers 1 January 1980 (and before) to 1 January 1995, Tier II 2 January 1995 to 1 January 2010, and Tier III 1 January 2010 to present) and have different benefit provisions (e.g. Tier I employees can retire at age 50 with 80% benefits or wait until 55 with full benefits, Tier II employees can retire at age 55 with 80% benefits or wait until 60 for full benefits, Tier III employees can retire at age 65 with full benefits). Therefore, Sam, hired in June 1983, would be subject to the provisions of the Tier I scheme, whereas Veronica, hired in August 1995, would be permitted to retire at age 60 with full benefits and Jessica, hired in December 2014, would not be able to retire with full benefits until she became 65.
DB funding
Defined benefit plans may be either ''funded'' or ''unfunded''.
In an ''unfunded'' defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers' contributions and taxes. This method of financing is known as pay-as-you-go, or
PAYGO
PAYGO (Pay As You GO) is the practice in the United States of financing expenditures with funds that are currently available rather than borrowed.
Budgeting
The PAYGO compels new spending or tax changes not to add to the federal debt. Not to be co ...
''. The social security systems of many European countries are unfunded, having benefits paid directly out of current taxes and social security contributions, although several countries have hybrid systems which are partially funded. Spain set up the Social Security Reserve Fund and France set up the
Pensions Reserve Fund; in Canada the
wage-based retirement plan (CPP) is partially funded, with assets managed by the
CPP Investment Board
The Canada Pension Plan Investment Board (CPPIB; french: Office d'investissement du régime de pensions du Canada), operating as CPP Investments (french: Investissements RPC), is a Canadian Crown corporation established by way of the 1997 ''Cana ...
while the U.S.
Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
system is partially funded by investment in special U.S. Treasury Bonds.
In a ''funded'' plan, contributions from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits. All plans must be funded in some way, even if they are pay-as-you-go, so this type of plan is more accurately known as pre-funded or fully-funded. The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Typically, the contributions to be paid are regularly reviewed in a valuation of the plan's assets and liabilities, carried out by an
actuary
An actuary is a business professional who deals with the measurement and management of risk and uncertainty. The name of the corresponding field is actuarial science. These risks can affect both sides of the balance sheet and require asset man ...
to ensure that the pension fund will meet future payment obligations. This means that in a defined benefit pension, investment risk and investment rewards are typically assumed by the sponsor/employer and not by the individual. If a plan is not well-funded, the plan sponsor may not have the financial resources to continue funding the plan.
DB criticisms
Traditional defined benefit plan designs (because of their typically flat accrual rate and the decreasing time for interest discounting as people get closer to retirement age) tend to exhibit a J-shaped accrual pattern of benefits, where the present value of benefits grows quite slowly early in an employee's career and accelerates significantly in mid-career: in other words it costs more to fund the pension for older employees than for younger ones (an "age bias"). Defined benefit pensions tend to be less
portable
Portable may refer to:
General
* Portable building, a manufactured structure that is built off site and moved in upon completion of site and utility work
* Portable classroom, a temporary building installed on the grounds of a school to provide a ...
than defined contribution plans, even if the plan allows a lump sum cash benefit at termination. Most plans, however, pay their benefits as an annuity, so retirees do not bear the risk of low investment returns on contributions or of outliving their retirement income. The open-ended nature of these risks to the employer is the reason given by many employers for switching from defined benefit to defined contribution plans over recent years. The risks to the employer can sometimes be mitigated by discretionary elements in the benefit structure, for instance in the rate of increase granted on accrued pensions, both before and after retirement.
The age bias, reduced
portability and open ended risk make defined benefit plans better suited to large employers with less mobile workforces, such as the public sector (which has open-ended support from taxpayers). This coupled with a lack of foresight on the employers part means a large proportion of the workforce are kept in the dark over future investment schemes.
Defined benefit plans are sometimes criticized as being paternalistic as they enable employers or plan trustees to make decisions about the type of benefits and family structures and lifestyles of their employees. However they are typically more valuable than defined contribution plans in most circumstances and for most employees (mainly because the employer tends to pay higher contributions than under defined contribution plans), so such criticism is rarely harsh.
The "cost" of a defined benefit plan is not easily calculated, and requires an actuary or actuarial software. However, even with the best of tools, the cost of a defined benefit plan will always be an estimate based on economic and financial assumptions. These assumptions include the average retirement age and lifespan of the employees, the returns to be earned by the pension plan's investments and any additional taxes or levies, such as those required by the Pension Benefit Guaranty Corporation in the U.S. So, for this arrangement, the benefit is relatively secure but the contribution is uncertain even when estimated by a professional. This has serious cost considerations and risks for the employer offering a pension plan.
One of the growing concerns with defined benefit plans is that the level of future obligations will outpace the value of assets held by the plan. This "underfunding" dilemma can be faced by any type of defined benefit plan, private or public, but it is most acute in governmental and other public plans where political pressures and less rigorous accounting standards can result in excessive commitments to employees and retirees, but inadequate contributions. Many states and municipalities across the United States of America and Canada now face chronic pension crises.
DB examples
Many countries offer state-sponsored retirement benefits, beyond those provided by employers, which are funded by
payroll
A payroll is the list of employees of some company that is entitled to receive payments as well as other work benefits and the amounts that each should receive. Along with the amounts that each employee should receive for time worked or tasks pe ...
or other taxes. In the United States, the Social Security system is similar in function to a defined benefit pension arrangement, albeit one that is constructed differently from a pension offered by a private employer; however, Social Security is distinct in that there is no legally guaranteed level of benefits derived from the amount paid into the program.
Individuals that have worked in the UK and have paid certain levels of national insurance deductions can expect an income from the state pension scheme after their normal retirement. The state pension is currently divided into two parts: the basic state pension, State Second
ier
The Ier or Eriu ( hu, Ér) is a right tributary of the river Barcău (''Berettyó'') in Romania and Hungary. It discharges into the Barcău in Pocsaj. The Andrid Dam is constructed on this river. The Ier flows through the villages Acâș, Mihăie ...
Pension scheme called S2P. Individuals will qualify for the basic state pension if they have completed sufficient years contribution to their national insurance record. The S2P pension scheme is earnings related and depends on earnings in each year as to how much an individual can expect to receive. It is possible for an individual to forgo the S2P payment from the state, in lieu of a payment made to an appropriate pension scheme of their choice, during their working life. For more details see
UK pension provision
Pensions in the United Kingdom, whereby United Kingdom tax payers have some of their wages deducted to save for retirement, can be categorised into three major divisions - state, occupational and personal pensions.
The state pension is based on ...
.
Defined contribution plans
A defined contribution (DC) plan, is a pension plan where employers set aside a certain proportion (i.e. contributions) of a worker's earnings (such as 5%) in an investment account, and the worker receives this savings and any accumulated investment earnings upon retirement. These contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, sometimes through the purchase of an annuity which then provides a regular income. Defined contribution plans have become widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of defined benefit plans in the US has been steadily declining, as more and more employers see pension contributions as a large expense avoidable by disbanding the defined benefit plan and instead offering a defined contribution plan.
Money contributed can either be from employee salary deferral or from employer contributions. The
portability of defined contribution pensions is legally no different from the portability of defined benefit plans. However, because of the cost of administration and ease of determining the plan sponsor's liability for defined contribution plans (you do not need to pay an actuary to calculate the lump sum equivalent that you do for defined benefit plans) in practice, defined contribution plans have become generally portable.
In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer, and these risks may be substantial. In addition, participants do not necessarily purchase annuities with their savings upon retirement, and bear the risk of outliving their assets. (In the United Kingdom, for instance, it is a legal requirement to use the bulk of the fund to purchase an annuity.)
The "cost" of a defined contribution plan is readily calculated, but the benefit from a defined contribution plan depends upon the account balance at the time an employee is looking to use the assets. So, for this arrangement, the ''contribution is known'' but the ''benefit is unknown'' (until calculated).
Despite the fact that the participant in a defined contribution plan typically has control over investment decisions, the plan sponsor retains a significant degree of fiduciary responsibility over investment of plan assets, including the selection of investment options and administrative providers.
A defined contribution plan typically involves a number of service providers, including in many cases:
* Trustee
* Custodian
* Administrator
* Recordkeeper
* Auditor
* Legal counsel
* Investment management company
DC examples
In the United States, the legal definition of a defined contribution plan is a plan providing for an individual account for each participant, and for benefits based solely on the amount contributed to the account, plus or minus income, gains, expenses and losses allocated to the account (see ). Examples of defined contribution plans in the United States include
individual retirement account
An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's ear ...
s (IRAs) and
401(k) plans
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their ...
. In such plans, the employee is responsible, to one degree or another, for selecting the types of
investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
s toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined
mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
s to selecting individual
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
s or other
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
. Most self-directed retirement plans are characterized by certain
tax advantage
Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. Examples of tax-advantaged accounts and investments include retirement plans, education saving ...
s, and some provide for a portion of the employee's contributions to be matched by the employer. In exchange, the funds in such plans may not be withdrawn by the investor prior to reaching a certain age—typically the year the employee reaches 59.5 years old (with a small number of exceptions)—without incurring a substantial penalty.
Advocates of defined contribution plans point out that each employee has the ability to tailor the investment portfolio to his or her individual needs and financial situation, including the choice of how much to contribute, if anything at all. However, others state that these apparent advantages could also hinder some workers who might not possess the financial savvy to choose the correct investment vehicles or have the discipline to voluntarily contribute money to retirement accounts.
In the US, defined contribution plans are subject to
IRS
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory tax ...
limits on how much can be contributed, known as the section 415 limit. In 2009, the total deferral amount, including employee contribution plus employer contribution, was limited to $49,000 or 100% of compensation, whichever is less. The employee-only limit in 2009 was $16,500 with a $5,500 catch-up. These numbers usually increase each year and are indexed to compensate for the effects of inflation. For 2015, the limits were raised to $53,000 and $18,000, respectively.
Examples of defined contribution pension schemes in other countries are, the UK's personal pensions and proposed
National Employment Savings Trust
The National Employment Savings Trust (Nest) is a defined contribution workplace pension scheme in the United Kingdom. It was set up to facilitate automatic enrolment as part of the government's workplace pension reforms under the Pensions Act ...
(NEST), Germany's Riester plans, Australia's Superannuation system and New Zealand's KiwiSaver scheme. Individual pension savings plans also exist in Austria, Czech Republic, Denmark, Greece, Finland, Ireland, Netherlands, Slovenia and Spain
Risk sharing pensions
Many developed economies are moving beyond DB & DC Plans and are adopting a new breed of collective risk sharing schemes where plan members pool their contributions and to a greater or less extent share the investment and
longevity risk
A longevity risk is any potential risk attached to the increasing life expectancy of pensioners and policy holders, which can eventually result in higher pay-out ratios than expected for many pension funds and insurance companies.
One important ...
.
There are multiple naming conventions for these plans reflecting the fact that the future payouts are a ''target'' or ''ambition'' of the plan sponsor rather than a guarantee, common naming conventions include:
* Defined Ambition Plans
*
Target benefit plan A target benefit plan is a type of pension plan that is similar to a defined contribution plan in that it involves fixed contributions, or a fixed range of contributions, which are set independently of a plan's funded position. Benefits are based on ...
s
* Collective Defined Contribution Schemes
*
Tontine
A tontine () is an investment linked to a living person which provides an income for as long as that person is alive. Such schemes originated as plans for governments to raise capital in the 17th century and became relatively widespread in the 18 ...
Pensions (the original longevity risk sharing scheme invented in 1653).
Risk sharing pension sponsor examples
* Canada:
Healthcare of Ontario Pension Plan
Health care or healthcare is the improvement of health via the prevention, diagnosis, treatment, amelioration or cure of disease, illness, injury, and other physical and mental impairments in people. Health care is delivered by health profess ...
(HOOPP)
* US:
State of Wisconsin Investment Board
The State of Wisconsin Investment Board (SWIB), created in 1951, is an independent state agency responsible for managing the assets of the Wisconsin Retirement System , the State Investment Fund (SIF), and other state trust funds. , SWIB managed $ ...
* US:
TIAA
The Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA, formerly TIAA-CREF), is a Fortune 100 financial services organization that is the leading provider of financial services in the academic, research, ...
* APAC/Europe:
Tontine Trust
A tontine () is an investment linked to a living person which provides an income for as long as that person is alive. Such schemes originated as plans for governments to raise capital in the 17th century and became relatively widespread in the 18 ...
* UK:
Royal Mail
, kw, Postya Riel, ga, An Post Ríoga
, logo = Royal Mail.svg
, logo_size = 250px
, type = Public limited company
, traded_as =
, foundation =
, founder = Henry VIII
, location = London, England, UK
, key_people = * Keith Williams ...
Pension Fund
* Netherlands:
Stichting Pensioenfonds ABP
Stichting Pensioenfonds ABP ("National Civil Pension Fund"), frequently referred to as ABP, is the pension fund for government and education employees in the Netherlands. For the quarter ended 31 December 2014, ABP had 2.8 million participants an ...
* Denmark:
Arbejdsmarkedets Tillægspension Arbejdsmarkedets Tillægspension (ATP) is a supplementary (income-related) pension in Denmark, and is Denmark's largest lifelong pension plan. Citizens of Denmark become eligible for ATP payments as soon as they turn 65 years old. Arbejdsmarkedet ...
Other pension plan types
Hybrid and cash balance plans
Hybrid plan designs combine the features of defined benefit and defined contribution plan designs.
A
cash balance plan
A cash balance plan is a defined benefit retirement plan that maintains hypothetical individual employee accounts like a defined contribution plan. The hypothetical nature of the individual accounts was crucial in the early adoption of such plans ...
is a defined benefit plan made to appear as if it were a defined contribution plan. They have ''notional balances'' in hypothetical accounts where, typically, each year the plan administrator will contribute an amount equal to a certain percentage of each participant's salary; a second contribution, called ''interest credit'', is made as well. These are not actual contributions and further discussion is beyond the scope of this entry suffice it to say that there is currently much controversy.
In general, they are usually treated as
defined benefit plan
Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age, ...
s for tax, accounting and regulatory purposes. As with defined benefit plans, investment risk in hybrid designs is largely borne by the plan sponsor. As with defined contribution designs, plan benefits are expressed in the terms of a notional ''account balance,'' and are usually paid as cash balances upon termination of employment. These features make them more
portable
Portable may refer to:
General
* Portable building, a manufactured structure that is built off site and moved in upon completion of site and utility work
* Portable classroom, a temporary building installed on the grounds of a school to provide a ...
than traditional defined benefit plans and perhaps more attractive to a more highly mobile workforce.
Target benefit plan A target benefit plan is a type of pension plan that is similar to a defined contribution plan in that it involves fixed contributions, or a fixed range of contributions, which are set independently of a plan's funded position. Benefits are based on ...
s are defined contribution plans made to match (or resemble) defined benefit plans.
Contrasting types of retirement plans
Advocates of defined contribution plans point out that each employee has the ability to tailor the investment portfolio to his or her individual needs and financial situation, including the choice of how much to contribute, if anything at all. However, others state that these apparent advantages could also hinder some workers who might not possess the financial savvy to choose the correct investment vehicles or have the discipline to voluntarily contribute money to retirement accounts. This debate parallels the discussion currently going on in the U.S., where many
Republican
Republican can refer to:
Political ideology
* An advocate of a republic, a type of government that is not a monarchy or dictatorship, and is usually associated with the rule of law.
** Republicanism, the ideology in support of republics or agains ...
leaders favor transforming the Social Security system, at least in part, to a self-directed investment plan.
Financing
Defined contribution pensions, by definition, are funded, as the "guarantee" made to employees is that specified (defined) contributions will be made during an individual's working life.
There are many ways to finance a pension and save for retirement. Pension plans can be set up by an employer, matching a monetary contribution each month, by the state or personally through a pension scheme with a financial institution, such as a bank or brokerage firm. Pension plans often come with a tax break depending on the country and plan type.
For example, Canadians have the option to open a
registered retirement savings plan (RRSP), as well as a range of employee and state pension programs. This plan allows contributions to this account to be marked as un-taxable income and remain un-taxed until withdrawal. Most countries' governments will provide advice on pension schemes.
Financing structure
Social and state pensions depend largely upon legislation for their sustainability. Some have identified funds, but these hold essentially government bonds—a form of "IOU" by the state which may rank no higher than the state's promise to pay future pensions.
Occupational pensions are typically provided through employment agreements between workers and employers, and their financing structure must meet legislative requirements. In common-law jurisdictions, the law requires that pensions be pre-funded in trusts, with a range of requirements to ensure the trustees act in the best interests of the beneficiaries. These jurisdictions account for over 80% of assets held by private pension plans around the world. Of the $50.7 trillion of global assets in 2019, $32.2T were in U.S. plans, the next largest being the U.K. ($3.2T), Canada ($2.8T), Australia ($1.9T), Singapore ($0.3T), Hong Kong and Ireland (each roughly $0.2T), New Zealand, India, Kenya, Nigeria, Jamaica, etc.
Civil-law jurisdictions with statutory trust vehicles for pensions include the Netherlands ($1.8T), Japan ($1.7T), Switzerland ($1.1T), Denmark ($0.8T), Sweden, Brazil and S. Korea (each $0.5T), Germany, France, Israel, P.R. China, Mexico, Italy, Chile, Belgium, Spain and Finland (each roughly $0.2T), etc. Without the vast body of common law to draw upon, statutory trusts tend to be more uniform and tightly regulated.
However, pension assets alone are not a useful guide to the total distribution of occupational pensions around the world. It will be noted that four of the largest economies (Germany, France, Italy and Spain) have very little in the way of pension assets. Nevertheless, in terms of typical net income replacement in retirement, these countries rank well relative to those with pension assets. These and other countries represent a fundamentally different approach to pension provision, often referred to as "intergenerational solidarity".
Intergenerational solidarity operates to an extent in any country with a defined-benefit social security system, but is more controversial when applied to high levels of professional income. Why should younger generations pay for executive pensions which they themselves are unsure of collecting? Employers have sought ways of getting round this problem through pre-funding, but in civil-law countries have often been limited by the legal vehicles available. A suitable legal vehicle should ideally have three qualities:
* It should convince employees that the assets are truly secured for their benefit;
* Contributions to the vehicle should be tax-deductible to the employer (or at least, a tax deduction should be secured already), and
* To the extent that it has funded the pension liability, the employer may reduce the liability shown on its balance sheet.
In the absence of appropriate statute, attempts have been made to invent suitable vehicles with varying degrees of success. The most notable has been in Germany where, until the end of the 20th century, most occupational pensions were unfunded ("book-reserved") promises by employers. Changes started in 1983 and by 1993 the preamble to proposed regulations under Section 404A of the U.S. Internal Revenue Code stated (when discussing deductible contributions to the German equivalent of a trust):
...the Security Contract combines a book reserve commitment by an employer with a pledge and guaranty. First, an employer establishes a book reserve for its pension liabilities for which it receives a deduction under German law. It then establishes a wholly-owned subsidiary to which it transfers assets to fund its pension liabilities... e subsidiary pledges its assets irrevocably to a custodian who then gives a guaranty to the employees to pay the benefits up to the assets pledged to the custodian in the event an employer declares bankruptcy or goes into receivership. The custodian's guaranty is intended to place a prior lien on the assets pledged and protect them from the claims of the employer's creditors in the event of bankruptcy or receivership.
In December 2000, a magazine article described:
...an artificial legal construction which, via a series of legal pledges between the employer, the employee and a separate custodian of the created pension fund, makes it possible to overcome the limitations of German law and establish what is effectively an Anglo Saxon-style trust. This is a model which has created a great deal of interest in Germany, and several big name employers have already adopted a similar approach to enable unrestricted funding of their occupational pension schemes. Examples include Shell, Daimler-Chrysler and Hewlett Packard.
As of August 2021, a major accounting firm describes what it calls the "market standard":
...the standard instrument for the (out-) financing of pension commitments... From the employer's point of view, this primarily serves the purpose of taking pension provisions off the balance sheet but also the purpose of ensuring insolvency protection under private law of those pension claims that are not covered by the statutory insolvency protection.... In practice, so-called double-sided CTAs have become market standard, at the latest since the judgement of the German Federal Labour Court (Bundesarbeitsgericht, BAG) of 18 July 2013 (6 AZR 47/12). In this ruling, the BAG assumed the resistance to insolvency of a double-sided CTA when it comes to the insolvency protection of credit balances of employees from part-time employment relationships with older employees. The double-sided CTA comprises the trustee's administrative trust relationship with the employer for the administration of the trust assets as well as the security trust relationship between the trustee and the pension beneficiary, which is aimed at fulfilling the company pension commitment in the defined security cases. The outsourcing of pension provisions for accounting purposes requires that the trust assets which the trustor contributes to the CTA—depending on the applicability of German GAAP/HGB or IFRS accounting approach—meet the balance sheet requirements as netting cover assets (section 246 (2) sentence 2 HGB) or as netting plan assets (IAS 19.8)... The... trust assets contributed to the CTA by the trustor may only be used to meet the claims of the beneficiaries.
It therefore seems fair to say that first tax deductions, then favorable accounting treatment, spurred innovation in pension-financing structure which secured beneficiaries' rights, quite independently of government initiative. Similar developments have occurred elsewhere, but the large scale of the German pension assets involved (not officially measured but at least in the several tens of billion dollars) make its story unique.
History
In the classical world, Romans offered veteran legionnaires (centurions) military pensions, typically in the form of a land grant or a special, often semi-public, appointment.
Augustus
Caesar Augustus (born Gaius Octavius; 23 September 63 BC – 19 August AD 14), also known as Octavian, was the first Roman emperor; he reigned from 27 BC until his death in AD 14. He is known for being the founder of the Roman Pri ...
Caesar (63 BC–AD 14) introduced one of the first recognisable pension schemes in history with his military treasury. In 13 BC Augustus created a pension plan in which retired soldiers were to receive a pension (of minimum 3,000 denarii in a lump sum, which at the time represented around 13 times a legionnaires' annual salary) after 16 years of service in a legion and four years in the military reserves. The retiring soldiers were in the beginning paid from general revenues and later from a special fund (''aeririum militare'') established by Augustus in 5 or 6 AD.
[Clark, R. L., Craig, L. A., & Wilson, J. W. (n.d.). A History of Public Sector Pensions in the United States. Philadelphia, Pennsylvania 19104-4011: University of Pennsylvania Press. Retrieved from https://pensionresearchcouncil.wharton.upenn.edu/wp-content/uploads/2015/09/0-8122-3714-5-3.pdf] This was in an attempt to quell a rebellion within the Roman Empire which was facing militaristic turmoil at the time. This, whilst did ease tensions within the empire, allegedly became one of the main reasons for the Empires eventual collapse as it struggled to finance the extensive support to which it committed itself. Despite helping the military, the Empire did little to help ordinary systems as the concept of social security came around at a much later time in history.
Widows' funds were among the first pension type arrangement to appear. For example,
Duke Ernest the Pious of
Gotha
Gotha () is the fifth-largest city in Thuringia, Germany, west of Erfurt and east of Eisenach with a population of 44,000. The city is the capital of the district of Gotha and was also a residence of the Ernestine Wettins from 1640 until the ...
in Germany founded a widows' fund for clergy in 1645 and another for teachers in 1662. "Various schemes of provision for ministers' widows were then established throughout Europe at about the start of the eighteenth century, some based on a single premium others based on yearly premiums to be distributed as benefits in the same year."
Modern forms of pension systems were first introduced in the late 19th century. Germany was the first country to introduce a universal pension program for employees.
Germany
As part of
Otto von Bismarck
Otto, Prince of Bismarck, Count of Bismarck-Schönhausen, Duke of Lauenburg (, ; 1 April 1815 – 30 July 1898), born Otto Eduard Leopold von Bismarck, was a conservative German statesman and diplomat. From his origins in the upper class of J ...
's social legislation, the
Old Age and Disability Insurance Bill was enacted and implemented in 1889. The Old Age Pension program, financed by a tax on workers, was originally designed to provide a pension annuity for workers who reached the age of 70 years, though this was lowered to 65 years in 1916. Unlike accident insurance and health insurance, this program covered industrial, agrarian, artisans and servants from the start and was supervised directly by the state.
Germany's mandatory state pension provisions are based on the pay-as-you-go (or redistributive) model. Funds paid in by contributors (employees and employers) are not saved and neither invested but are used to pay current pension obligations.
Recently, the German government has come under criticism for the impending disaster posed by the exorbitant tax burden resulting from civil servants' pensions. A study, commissioned by the Taxpayers Association, that Professor Bernd Raffelhüschen of the Generation Contracts Research Center of the University of Freiburg carried out states that by 2050, the state will have to spend 1.3 to 1.4 trillion EUR to supply its civil servants. The majority of it, about 870 billion EUR, is therefore spent on pensions.
The federal government's financial statements for 2016 already show the extent of that disaster. According to this, the expected costs for pensions and subsidies for medical treatment for the number of federal civil servants at the end of 2016 will amount to 647 billion EUR over the course of the next ten years. That is 63 billion EUR more than in the previous year—an increase of ten percent in just one year.
The sum is divided into:
* Pension obligations of EUR 477.96 billion (plus 9.7 percent) and
* Aid obligations of EUR 169.02 billion (plus 13.4 percent).
Officials, judges and soldiers account for 238.4 billion EUR of the expected pension expenditure of almost 478 billion EUR. In addition, there are legacy issues from the times of large state-owned companies: the federal government has to pay out 171 billion EUR for old-age pensions for former postal officials and 68.5 billion EUR for former railway officials.
The problem: while the government preaches private pension provision to workers, the state itself has failed to build adequate reserves for the wave of pensions in the coming years. The federal government has been trying to create a cushion since 2007. So far, however, this has amounted to only 14 billion EUR by 2018. Professor Bernd Raffelhüschen criticised that the state had made high pension commitments for decades, "but initially didn't build up any reserves for a long time."
Pensions, thus, represent a considerable burden for public budgets. As Professor Bernd Raffelhüschen calculated in his study in 2005, the present value of the pension burden for the federal states amounts to 1,797 billion EUR, which is larger than the Germany's total public debt.
In various federal states, efforts are being made to secure pension expenditure by setting up pension funds for newly hired civil servants. Fiscal relief is, however, to be expected only when the newly hired officials retire. The share of tax revenue needed to supply for the pensions will increase from approximately 10% in 2001 in many federal states to over 20% in 2020. In the extreme case of the city-state of Hamburg, every fourth euro of income will be used to finance pensions for their retired civil servants.
Ireland
There is a history of pensions in
Ireland
Ireland ( ; ga, Éire ; Ulster Scots dialect, Ulster-Scots: ) is an island in the Atlantic Ocean, North Atlantic Ocean, in Northwestern Europe, north-western Europe. It is separated from Great Britain to its east by the North Channel (Grea ...
that can be traced back to
Brehon Law
Early Irish law, historically referred to as (English: Freeman-ism) or (English: Law of Freemen), also called Brehon law, comprised the statutes which governed everyday life in Early Medieval Ireland. They were partially eclipsed by the Norma ...
imposing a legal responsibility on the kin group to take care of its members who were aged, blind, deaf, sick or insane. For a discussion on pension funds and early Irish law, see F Kelly, ''A Guide to Early Irish Law'' (Dublin,
Dublin Institute for Advanced Studies
The Dublin Institute for Advanced Studies (DIAS) ( ga, Institiúid Ard-Léinn Bhaile Átha Cliath) is a statutory independent research institute in Ireland. It was established in 1940 on the initiative of the Taoiseach, Éamon de Valera, in Dub ...
, 1988). In 2010, there were over 76,291 pension schemes operating in Ireland.
In January 2018, a "total contributions approach" qualification system was announced, effective from March 2018, for those pensioners who reached state pension age after 1 September 2012. The new system requires a person to have 40 years' worth or contributions to receive the full rate and a minimum total period of paid contributions of 520 weeks with ten years' full coverage. The State Pension is payable from age 66 with the age being increased to 67 in 2021 and 68 in 2028.
United Kingdom
![Leeds public sector pensions strike in November 2011 14](https://upload.wikimedia.org/wikipedia/commons/4/4e/Leeds_public_sector_pensions_strike_in_November_2011_14.jpg)
The decline of Feudal systems and formation of national states throughout Europe led to the reemergence of standing armies with their allegiances to states. Consequently, the sixteenth century in England marked the establishment of standardised systems of military pensions. During its 1592–93 session, Parliament established disability payments or "reliefe for Souldiours ...
hoadventured their lives and lost their limbs or disabled their bodies" in the service of the Crown. This pension was again generous by contemporary standards, even though annual pensions were not to exceed ten pounds for "private soldiers", or twenty pounds for a "lieutenant".
The beginning of the modern state pension came with the
Old Age Pensions Act 1908
The Old-Age Pensions Act 1908 is an Act of Parliament of the United Kingdom of Great Britain and Ireland, passed in 1908. The Act is often regarded as one of the foundations of modern social welfare in both the present-day United Kingdom and the ...
, that provided 5 shillings (£0.25) a week for those over 70 whose annual means do not exceed £31.50. It coincided with the
and was the first step in the
Liberal welfare reforms
The Liberal welfare reforms (1906–1914) were a series of acts of social legislation passed by the Liberal Party after the 1906 general election. They represent the emergence of the modern welfare state in the United Kingdom. The reforms demons ...
to the completion of a system of social security, with unemployment and health insurance through the
National Insurance Act 1911
The National Insurance Act 1911 created National Insurance, originally a system of health insurance for industrial workers in Great Britain based on contributions from employers, the government, and the workers themselves. It was one of the foun ...
.
In 1921, The Finance Act introduced tax relief on pension contributions in line with savings and life insurance. As a consequence, the overall size of the fund was increased since the income tax was now added to the pension as well.
Then in 1978, The
State Earnings-Related Pension Scheme (SERPS) replaced The Graduated Pension Scheme from 1959, providing a pension related to earnings, in addition to the basic state pension. Employees and employers had the possibility to contribute to it between 6 April 1978 and 5 April 2002, when it was replaced by the
State Second Pension.
After the Second World War, the
National Insurance Act 1946
The National Insurance Act 1946 (c 67) was a British Act of Parliament passed during the Attlee ministry which established a comprehensive system of social security throughout the United Kingdom.
The act meant that all who were of working age wer ...
completed universal coverage of social security, introducing a State Pension for everybody on a contributory basis, with men being eligible at 65 and women at 60.
The
National Assistance Act 1948
The National Assistance Act 1948 is an Act of Parliament passed in the United Kingdom by the Labour government of Clement Attlee. It formally abolished the Poor Law system that had existed since the reign of Elizabeth I, and established a social ...
formally abolished the poor law, and gave a minimum income to those not paying National Insurance.
The early-1990s established the existing framework for state pensions in the
Social Security Contributions and Benefits Act 1992
Social organisms, including human(s), live collectively in interacting populations. This interaction is considered social whether they are aware of it or not, and whether the exchange is voluntary or not.
Etymology
The word "social" derives from ...
and Superannuation and other Funds (Validation) Act 1992. Following the highly respected
Goode Report {{Short description, Government issued inquiry
''Pension Law Reform'' (1993) Cm 2342, also known as the Goode Report after its leading author, Roy Goode, was a UK government commissioned inquiry into the state of pensions in the United Kingdom, whic ...
, occupational pensions were covered by comprehensive statutes in the
Pension Schemes Act 1993
The Pension Schemes Act 1993c 48 is a United Kingdom Act of Parliament that concerns the administration of occupational pensions.
Background
The Pension Schemes Act 1993 was the first statute to result from the comprehensive inquiry led by Roy ...
and the
Pensions Act 1995
The Pensions Act 1995c 26 is a piece of United Kingdom legislation to improve the running of pension schemes.
Background
Following the death of Robert Maxwell, it became clear that he had embezzled a large amount of money from the pension fund o ...
.
In 2002, the
Pensions Commission was established as a cross-party body to review pensions in the United Kingdom. The first Act to follow was the
Pensions Act 2004
The Pensions Act 2004 (c 35) is an Act of the Parliament of the United Kingdom to improve the running of pension schemes.
Background
In the years following the introduction of the Pensions Act 1995, it was widely perceived that it was failing ...
that updated regulation by replacing OPRA with the
Pensions Regulator
The Pensions Regulator (TPR) is a non-departmental public body which regulates work-based pension schemes in the United Kingdom. Created under the Pensions Act 2004, the regulator replaced the Occupational Pensions Regulatory Authority (OPRA) fro ...
and relaxing the stringency of minimum funding requirements for pensions while ensuring protection for insolvent businesses. In a major update of the state pension, the
Pensions Act 2007
The Pensions Act 2007 (c 22) is an Act of the Parliament of the United Kingdom. It incorporated the main findings of the all-party Pensions Commission in 2006 as set out in the white paper ''Security in retirement: towards a new pension system' ...
, which aligned and raised retirement ages. Following that, the
Pensions Act 2008
The Pensions Act 2008c 30 is an Act of the Parliament of the United Kingdom. The principal change brought about by the Act is that all workers will have to opt out of an occupational pension plan of their employer, rather than opt in. A second c ...
has set up automatic enrolment for
occupational pensions
A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
, and a public competitor designed to be a low-cost and efficient fund manager, called the
National Employment Savings Trust
The National Employment Savings Trust (Nest) is a defined contribution workplace pension scheme in the United Kingdom. It was set up to facilitate automatic enrolment as part of the government's workplace pension reforms under the Pensions Act ...
(or "Nest").
United States
First "American" pensions came in 1636, when
Plymouth colony
Plymouth Colony (sometimes Plimouth) was, from 1620 to 1691, the British America, first permanent English colony in New England and the second permanent English colony in North America, after the Jamestown Colony. It was first settled by the pa ...
, and subsequently, other colonies such as Virginia, Maryland (1670s) and NY (1690s), offered the first colonial pension. The general assembly of the
Virginia Company
The Virginia Company was an English trading company chartered by King James I on 10 April 1606 with the object of colonizing the eastern coast of America. The coast was named Virginia, after Elizabeth I, and it stretched from present-day Main ...
followed by approving a resolution known as Virginia Act IX of 1644 stating that "...all hurt or maymed men be relieved and provided for by the several counties, where such men reside or inhabit." Furthermore, during
King Philip's War
King Philip's War (sometimes called the First Indian War, Metacom's War, Metacomet's War, Pometacomet's Rebellion, or Metacom's Rebellion) was an armed conflict in 1675–1676 between indigenous inhabitants of New England and New England coloni ...
, otherwise known as the First Indian War, this Act was expanded to widows and orphans in Virginia's Act of 1675.
Public pensions got their start with various 'promises', informal and legislated, made to veterans of the
Revolutionary War and, more extensively, the
Civil War
A civil war or intrastate war is a war between organized groups within the same state (or country).
The aim of one side may be to take control of the country or a region, to achieve independence for a region, or to change government policies ...
. They were expanded greatly, and began to be offered by a number of state and local governments during the early
Progressive Era
The Progressive Era (late 1890s – late 1910s) was a period of widespread social activism and political reform across the United States focused on defeating corruption, monopoly, waste and inefficiency. The main themes ended during Am ...
in the late nineteenth century.
Federal civilian pensions were offered under the
Civil Service Retirement System
The Civil Service Retirement System (CSRS) is a public pension fund organized in 1920 that has provided retirement, disability, and survivor benefits for most civilian employees in the United States federal government. Upon the creation of a new ...
(CSRS), formed in 1920. CSRS provided retirement, disability and survivor benefits for most civilian employees in the US Federal government, until the creation of a new Federal agency, the
Federal Employees Retirement System
The Federal Employees' Retirement System (FERS) is the retirement system for employees within the United States civil service. FERS became effective January 1, 1987, to replace the Civil Service Retirement System (CSRS) and to conform federal ret ...
(FERS), in 1987.
Pension plans became popular in the United States during
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
, when wage freezes prohibited outright increases in workers' pay. The defined benefit plan had been the most popular and common type of
retirement plan in the United States through the 1980s; since that time, defined contribution plans have become the more common type of retirement plan in the United States and many other western countries.
In April 2012, the
Northern Mariana Islands
The Northern Mariana Islands, officially the Commonwealth of the Northern Mariana Islands (CNMI; ch, Sankattan Siha Na Islas Mariånas; cal, Commonwealth Téél Falúw kka Efáng llól Marianas), is an unincorporated territory and commonw ...
Retirement Fund filed for
Chapter 11
Chapter 11 of the United States Bankruptcy Code (Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, wheth ...
bankruptcy
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
protection. The retirement fund is a
defined benefit
Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age, ...
type pension plan and was only partially funded by the government, with only $268.4 million in
asset
In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
s and $911 million in
liabilities. The plan experienced low investment returns and a benefit structure that had been increased without raises in funding.
[
]
According to ''Pensions and Investments'', this is "apparently the first" US public pension plan to declare bankruptcy.
[
]
Current challenges
A growing challenge for many nations is population ageing
Population ageing is an increasing median age in a population because of declining fertility rates and rising life expectancy. Most countries have rising life expectancy and an ageing population, trends that emerged first in developed countries b ...
. As birth rates drop and life expectancy
Life expectancy is a statistical measure of the average time an organism is expected to live, based on the year of its birth, current age, and other demographic factors like sex. The most commonly used measure is life expectancy at birth ...
increases an ever-larger portion of the population is elderly. This leaves fewer workers for each retired person. In many developed countries this means that government and public sector
The public sector, also called the state sector, is the part of the economy composed of both public services and public enterprises. Public sectors include the public goods and governmental services such as the military, law enforcement, infra ...
pensions could potentially be a drag on their economies unless pension systems are reformed or taxes are increased. One method of reforming the pension system is to increase the retirement age. Two exceptions are Australia
Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
and Canada
Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
, where the pension system is forecast to be solvent
A solvent (s) (from the Latin '' solvō'', "loosen, untie, solve") is a substance that dissolves a solute, resulting in a solution. A solvent is usually a liquid but can also be a solid, a gas, or a supercritical fluid. Water is a solvent for ...
for the foreseeable future. In Canada, for instance, the annual payments were increased by some 70% in 1998 to achieve this. These two nations also have an advantage from their relative openness to immigration: immigrants tend to be of working age. However, their populations are not growing as fast as the U.S., which supplements a high immigration rate with one of the highest birthrates among Western countries. Thus, the population in the U.S. is not ageing to the extent as those in Europe, Australia, or Canada.
Another growing challenge is the recent trend of states and businesses in the United States purposely under-funding their pension schemes in order to push the costs onto the federal government. For example, in 2009, the majority of states have unfunded pension liabilities exceeding all reported state debt. Bradley Belt
Bradley Belt is an American businessman. He is the CEO of Palisades Capital and the managing director of the Milken Institute. He is vice chairman of Orchard Global Asset Management.
He is the former executive director of the Pension Benefit Gu ...
, former executive director of the PBGC (the Pension Benefit Guaranty Corporation
The Pension Benefit Guaranty Corporation (PBGC) is a United States federally chartered corporation created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined b ...
, the federal agency that insures private-sector defined-benefit pension plans in the event of bankruptcy), testified before a Congressional hearing in October 2004, "I am particularly concerned with the temptation, and indeed, growing tendency, to use the pension insurance fund as a means to obtain an interest-free and risk-free loan to enable companies to restructure. Unfortunately, the current calculation appears to be that shifting pension liabilities onto other premium payers or potentially taxpayers is the path of least resistance rather than a last resort."
Challenges have further been increased by the post-2007 credit crunch. Total funding of the nation's 100 largest corporate pension plans fell by $303bn in 2008, going from a $86bn surplus at the end of 2007 to a $217bn deficit at the end of 2008.
Pillars
Most national pension systems are based on multi-pillar schemes to ensure greater flexibility and financial security to the old in contrast to reliance on one single system. In general, there are three main functions of pension systems: saving, redistribution and insurance functions.
According to the report by the World Bank titled "Averting the Old Age Crisis", countries should consider separating the saving and redistributive functions, when creating pension systems, and placing them under different financing and managerial arrangements into three main pillars.
The Pillars of Old Age Income Security:
However, this typology is rather a prescriptive than a descriptive one and most specialists usually allocate all public programmes to the first pillar, including earnings-related public schemes, which does not fit the original definition of the first pillar.[OECD (2006), “Pension-system Typology”, in OECD Pensions at a Glance 2005: Public Policies across
OECD Countries, OECD Publishing, Paris. https://doi.org/10.1787/pension_glance-2005-3-en]
Zero pillar
This non-contributory pillar was introduced only recently, aiming to alleviate poverty among the elderly, and permitting fiscal conditions. It is usually financed by the state and is in form of basic pension schemes or social assistance.[Holzmann, R., Hinz, R., von Gersdorff, H., Gill, I., Impavido, G., Musalem, A. R., … Subbarao, K. (2005). Old-Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform (pp. 10–10). N.W. Washington, D.C. 20433,USA: The International Bank for Reconstruction and Development / THE WORLD BANK. Retrieved from http://siteresources.worldbank.org/INTPENSIONS/Resources/Old_Age_Inc_Supp_Full_En.pdf] In some typologies, the zero and the first pillar overlap.
First pillar
Pillar 1, sometimes referred to as ''the public pillar'' or ''first-tier'', answers the aim to prevent the poverty of the elderly, provide some absolute, minimum income based on solidarity and replace some portion of lifetime pre-retirement income. It is financed on a redistributive principle without constructing large reserves and takes the form of mandatory contributions linked to earnings such as minimum pensions within earnings-related plans, or separate targeted programs for retirement income. These are provided by the public sector and typically financed on pay-as-you-go basis.
Second pillar
Pillar 2, or ''the second tier,'' built on the basis of defined benefit and defined contribution plans with independent investment management, aims to protect the elderly from relative poverty and provides benefits supplementary to the income from the first pillar to contributors.[ erziev, Venelin. (2019). HISTORICAL DEVELOPMENT AND CHARACTERISTICS OF PENSION SYSTEMS. 5. 124-135./ref> Therefore, the second pillar fulfils the insurance function. In addition to DB's and DC's, other types of pension schemes of the second pillar are ''the contingent accounts'', known also as Notional Defined Contributions (implemented for example in Italy, Latvia, Poland and Sweden) or ''occupational pension schemes'' (applied, for instance, in Estonia, Germany and Norway).]
Third pillar
The third tier consists of voluntary contributions in various different forms, including occupational or private saving plans, and products for individuals.
Fourth Pillar
The fourth pillar is usually excluded from classifications since it does not usually have a legal basis and consists of "informal support (such as family), other formal social programs (such as health care or housing), and other individual assets (such as home ownership and reverse mortgages)."
These five pillars and their main criteria are summarised in the table below by Holzmann and Hinz.
Multipillar Pension Taxonomy:
Different channels for Governments to finance the retirement pension
Government can play with four different channels to finance the retirement pension. These economic policies
The economy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, national ownership, and many other areas of government interventions into the e ...
are the following ones:
* Decrease of real pensions,
* Increase of employee social contribution,
* Increase of employer social contribution,
* Increase of the retirement age.
These channels have been used by many governments to implement new retirement pension reforms. In the past, they had been sometimes simultaneously used (two or three channels used in the same time for a pension reform) or with a targeted way (on a certain group of persons such as in a certain business sector).
Retirement pensions turn out to be considerable amounts of money. For instance, in France
France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
, it is about 300 billion euros each year, namely 14-15% of French GDP. It is therefore very interesting and informative to illustrate the impacts of these different channels to finance the retirement pension, especially nowadays since many riots take place in different countries against new retirement pension reforms or willing to change the national retirement pension process.
Simulating these economic policies is then useful to understand every mechanism linked to these channels. Four different channels to finance retirement pensions will be simulated successively and will allow to explain their impacts on main economic variables presented below with an eight-year horizon. Some software of macroeconomic simulation allows to compute and display them. The implementation of these economic shocks and their mechanisms will be analysed in the following sections.
The economic variables of interest are various but the main ones can be chosen as follows: GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
level (impact in %), total employment level (impact in %), price index (impact in %), price growth rate (impact in points), current account Current account or Current Account may refer to:
* Current account (balance of payments), a country's balance of trade, net of factor income and cash transfers
* Current account (banking)
A transaction account, also called a checking account, ch ...
(impact in GDP points), public finance balance (impact in GDP points) An objective relation may also be used. This one is a linear combination of the previous variables. This one is weighted according to the prominence given to some variables. For instance, if the government mainly focuses on GDP level and public finance balance, their assigned coefficient can be chosen as 0.3 each (the sum of the coefficients must be equal to 1). Other more specific variables could be used such as: household expenses level, corporate investments level, domestic demand level, purchasing power
Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...
level and the like.
As a consequence, simulations are very relevant for everyone to understand the impacts of these channels to finance the retirement pension. However, simulations could be used in a reverse manner. Given the objective of government to get an economic variable improvement by a certain number, the four channels can be adjusted in order to achieve this goal. For example, a government may have an objective to get a public finance improvement by 2/3 GDP point the year 8.
In order to lead these simulations, the choice of hypotheses assumed is crucial. Concerning exchange rates, one can use the Purchasing Power Parity
Purchasing power parity (PPP) is the measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries' currency, currencies. PPP is effectively the ratio of the price of ...
(PPP) measurement which happens to be an absolute purchasing power comparison in the countries concerned. Regarding interest rates, one can choose the Taylor Rule
The Taylor rule is a monetary policy targeting rule. The rule was proposed in 1992 by American economist John B. Taylor for central banks to use to stabilize economic activity by appropriately setting short-term interest rates.
The rule consider ...
with a risk premium
A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. It is used widely in finance and economics, the general definition being the expected risky return less t ...
coefficient of -0.1. External trade price elasticities can also be assumedtobe -1. When it comes to Monetary Union, it depends on which country the study and thus the simulations are led. A Monetary Union can be concerned with any country. However, in order to get consistent results, a country such as Germany, France or Italy could be analysed. In this case, the monetary union is established with other European countries members of the euro area. Finally, every economic policy is led in the country concerned only.
Decrease of real pensions
This economic shock is to permanently decrease the amount of real pensions paid to retirees by for example 1 GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
point. Transfers from public power to household
A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is im ...
s are therefore dropped by 1 GDP point. In the case of France (given 14–15% of GDP corresponds to retirement pensions), this is a drop of 7.5% of mass pension benefits.
It proves to be demand shock
In economics, a demand shock is a sudden event that increases or decreases demand for goods or services temporarily.
A positive demand shock increases aggregate demand (AD) and a negative demand shock decreases aggregate demand. Prices of goods ...
insofar as the household's available income decreases in the short term. This drop of purchasing power
Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...
implies a diminishment of consumption
Consumption may refer to:
*Resource consumption
*Tuberculosis, an infectious disease, historically
* Consumption (ecology), receipt of energy by consuming other organisms
* Consumption (economics), the purchasing of newly produced goods for curren ...
and of demand in general. The activity is then negatively affected. However, the current account Current account or Current Account may refer to:
* Current account (balance of payments), a country's balance of trade, net of factor income and cash transfers
* Current account (banking)
A transaction account, also called a checking account, ch ...
is improved as imports decrease following the reduce of domestic demand. In the medium term, since this cut of consumption and demand, unemployment
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for Work (human activity), w ...
increases. The price index decreases as the consumption price drops. As a consequence, exports increase. The real labour cost falls increasing thus companies' margins which limits the degradation of investments. The drop of consumption remains higher than the increase of current account which thereby results in the decrease of GDP. The public finance balance increases following the diminishment of pension benefits spent to retirees. However, unemployment benefits increase and given the drop of consumption and of household's incomes, which implies a fall in the incomes received from income tax and VAT by public administration.
Increase of employee social contribution
This economic shock involves the permanent increase of employee social contribution by for instance 2 points. This social contribution is spent by household as a share of mass wages received by them.
It turns out to be a demand shock because household's disposable income
Disposable income is total personal income minus current income taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major c ...
decreases from the short term. Indeed, the income perceived by employees is reduced following the increase of employee social contribution. As the previous channel, the drop of purchasing power result in a diminishment of consumption and demand in general. It implies a drop in activity. However, the current account Current account or Current Account may refer to:
* Current account (balance of payments), a country's balance of trade, net of factor income and cash transfers
* Current account (banking)
A transaction account, also called a checking account, ch ...
is improved as imports are reduced following the cut of interior demand. In the medium term, the implications are similar to the decrease of real pensions. Employment and the price index decrease. Exports increase and the drop of investments is limited. The GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
decreases too. Finally, in the short term, the public finance balance increases but is quickly limited (but remains an increase) with the decrease of revenues from VAT
A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the en ...
and income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
es and the increase of unemployment.
Increase of employer social contribution
This economic shock is to permanently increase employer social contribution by for instance 2 points. This social contribution is spent by employer as a share of mass wages paid to each employee.
It proves to be a supply economic shock. Indeed, the rise of the labour cost degrades the labour demand and increases the costs of production. The competitivity is degraded and results in the drop of the purchasing power. Job losses are then attended: the unemployment strongly increases. This shock is also inflationary Inflationism is a heterodox economic, fiscal, or monetary policy, that predicts that a substantial level of inflation is harmless, desirable or even advantageous. Similarly, inflationist economists advocate for an inflationist policy.
Mainstream ec ...
given that household's consumption prices rise. As corporations' profitability
In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs.
It i ...
drops, exports and companies' investment fall too. The current account drops and this shock is not expansionist
Expansionism refers to states obtaining greater territory through military empire-building or colonialism.
In the classical age of conquest moral justification for territorial expansion at the direct expense of another established polity (who of ...
: the GDP decreases. Finally, the public finance balance is improved but less than planned. Indeed, employer social contribution is increased but it happens to be less than expected as unemployment rises. In addition, income tax is lower than before the shock, employee social contribution increases and unemployment benefits expenses increase.
Increase of the retirement age
This economic shock involves an increase of the retirement age
This article lists the statutory retirement age in different countries.
Background
In some contexts, the retirement age is the age at which a person is expected or required to cease work. It is usually the age at which such a person may be enti ...
. To do so, it implies a permanent increase in the working age of for instance 2% and to decrease the number of retirees of an equivalent amount. For this last step, it is tantamount to decrease global real pensions by a certain number of GDP point. In order to find this precise number for the simulation, we can assume people live on average 80 years, study during 20 years and are retirees during 20 years. As a consequence, an increase of 2% for life expectancy at work amounts to a decrease of 4% for life expectancy in retirement. Real pensions make globally a certain percentage of the GDP according to the country chosen. By knowing it, you can finally find the certain number of GDP point to simulate the decrease of number of retirees. For instance, in France real pensions make globally around 15% of GDP. Finally, -4% of 15% makes a decrease of 0.6 of GDP point.
In the short term, this labour force shock (supply policy) leads to an increase of unemployment which negatively affects household's purchasing power. The consumption decreases along with demand in general which leads to a decrease of activity. However, the current account Current account or Current Account may refer to:
* Current account (balance of payments), a country's balance of trade, net of factor income and cash transfers
* Current account (banking)
A transaction account, also called a checking account, ch ...
is improved as imports are reduced with the drop of domestic demand. In the medium term, through the rise of unemployment, gross salary and the real labour cost progressively decreases. It results in the progressive increase of employment and thus the gradual decrease of unemployment. The household's consumption prices decrease: this shock is deflation
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation ...
ary. The competitivity is improved which lead to a job creation and the boost of economic activity. The GDP increases and this shock is therefore expansionist. Administration's financing capacity improved in the short term happens to be limited in the medium term. Indeed, the drop of prices decreases the tax bases, especially household income.
Pension systems by country
Notable examples of pension systems by country
Some of the listed systems might also be considered social insurance
Social insurance is a form of Social protection, social welfare that provides insurance against economic risks. The insurance may be provided publicly or through the subsidizing of private insurance. In contrast to other forms of Welfare, soci ...
.
* Argentina - Administración Nacional de la Seguridad Social
* Armenia - Pensions in Armenia
There are various types of Pensions in Armenia, including social pensions (granted to all individuals who reach the age of 63, both for laborers and not), mandatory funded pensions (a return on investment from mandatory funded pensions), or volun ...
* Australia:
** Superannuation in Australia
In Australia, superannuation, or just super, is the term for retirement pension benefit funds. Employers make compulsory contributions into these funds on behalf of their employees.
Superannuation is compulsory for all employed people workin ...
- Private, and compulsory, individual retirement contribution system.
** Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
- Public pensions
*Austria - Pensions in Austria
* Canada:
** Canada Pension Plan
The Canada Pension Plan (CPP; french: Régime de pensions du Canada) is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada's public retirement income system, the other component being Old ...
** Old Age Security
The Old Age Security (OAS) (SV; french: Sécurité de la vieillesse) program is a universal retirement pension available to most residents and citizens of Canada who have reached 65 years old. This pension is supplemented by the Guaranteed Income ...
** Quebec Pension Plan
The Canada Pension Plan (CPP; french: Régime de pensions du Canada) is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada's public retirement income system, the other component being Old ...
** Registered retirement savings plan
** Saskatchewan Pension Plan
* Finland - Kansaneläkelaitos
Kela, abbr. from fi, Kansaneläkelaitos, sv, Folkpensionsanstalten (Fpa), en, The Social Insurance Institution (SII), is a Finnish government agency in charge of settling benefits under national social security programs. Kela was founded in 193 ...
* France:
** Pensions in France
Pensions in France fall into five major divisions;
* Non-contributory minimum pension
*Mandatory state pension provision (first pillar)
*Mandatory occupational pension provision (second pillar)
*Voluntary private collective pension provision (th ...
** Allocation de Solidarité aux Personnes Agées
** Pensions Reserve Fund (France)
The French Pension Reserve Fund (french: Fonds de Réserve pour les Retraites, FRR) is a public entity created by law n°2001-624 dated 17 July 2001. Its mission is to invest monies entrusted to it by the public authorities on behalf of the commu ...
* Hong Kong:
** Mandatory Provident Fund
The Mandatory Provident Fund (), often abbreviated as MPF (), is a compulsory saving scheme (pension fund) for the retirement of residents in Hong Kong. Most employees and their employers are required to contribute monthly to mandatory provident f ...
(MPF Schemes)
** Occupational Retirement Schemes (ORSO Schemes)
* India:
** Pensions in India
India operates a complex pension system. There are however three major pillars to the Indian pension system: the solidarity social assistance called the National Social Assistance Programme (NSAP) for the elderly poor, the civil servants pensio ...
** National Pension System
National Pension System Trust (NPS Trust) is a
specialised division of Pension Fund Regulatory and Development Authority which is under the jurisdiction of Ministry of Finance of the Government of India. The National Pension System (NPS) is ...
** Employees' Provident Fund Organisation of India
* Japan - National Pension
* Malaysia - Employees Provident Fund
* Mexico - Mexico Pension Plan Mexico reformed its pension system in 1997, transforming it from a pay as you go (PAYG), defined benefit (DB) scheme to a fully funded, private and mandatory defined contribution (DC) scheme. The reform was modeled after the pension reforms in Chil ...
* Netherlands - Algemene Ouderdomswet
The ''Algemene Ouderdomswet'' ('General Old Age pensions Act, abbreviated AOW) is a 1956 Dutch law that installed a state pension for the elderly. This law was a continuation of a 1947 temporary law. The old law was a proposal by Willem Drees, whi ...
* New Zealand:
** New Zealand Superannuation – public pensions
** KiwiSaver
The KiwiSaver scheme, a New Zealand savings scheme, came into operation from Monday, 2 July 2007. Participants can normally access their KiwiSaver funds only after the age of 65, but can withdraw them in certain limited circumstances, for exampl ...
– Private voluntary retirement contribution system
* Poland - Social Insurance Institution
The Social Insurance Institution ( pl, Zakład Ubezpieczeń Społecznych, ZUS) is a Polish state organization responsible for social insurance
Social insurance is a form of social welfare that provides insurance against economic risks. The i ...
* Singapore - Central Provident Fund
The Central Provident Fund Board (CPFB), commonly known as the CPF Board or simply the Central Provident Fund (CPF), is a compulsory comprehensive savings and pension plan for working Singaporeans and permanent residents primarily to fund their ...
* South Korea - National Pension Service
The National Pension Service of Korea (NPS; ) is a public pension fund in South Korea. It is the third largest in the world with $800 billion in assets, and is the largest investor in South Korea.
South Korea's National Pension Service (NPS), wh ...
* Sweden - Social security in Sweden
Social security in Sweden is an aspect of the Swedish welfare system and consists of various social insurances handled by the National Agency for Social Insurance (), and welfare provided based on need by local municipalities. Social security ...
* Switzerland - Pension system in Switzerland
The Swiss pension system rests on three pillars:
*the state-run pension scheme for the aged, orphans, and surviving spouses
*the pension funds run by investment foundations, which are tied to employers
*voluntary, private investments
Overview
...
* United Kingdom:
** Pensions in the United Kingdom
Pensions in the United Kingdom, whereby United Kingdom tax payers have some of their wages deducted to save for retirement, can be categorised into three major divisions - state, occupational and personal pensions.
The state pension is based on ...
** Self-invested personal pension
A self-invested personal pension (SIPP) is the name given to the type of UK government-approved personal pension scheme which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and C ...
s
* United States:
** Public employee pensions
** Retirement plans in the United States
A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire t ...
** Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
* Vanuatu - Vanuatu National Provident Fund
The Vanuatu National Provident Fund (VNPF) is a compulsory pension scheme in Vanuatu
Vanuatu ( or ; ), officially the Republic of Vanuatu (french: link=no, République de Vanuatu; bi, Ripablik blong Vanuatu), is an island country located i ...
See also
* Elderly care
Elderly care, or simply eldercare (also known in parts of the English-speaking world as aged care), serves the needs and requirements of senior citizens. It encompasses assisted living, adult daycare, long-term care, nursing homes (often called re ...
* Financial advisor
A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...
and Fee-only financial advisor
A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...
* Generational accounting
Generational accounting is a method of measuring the fiscal burdens facing current and future generations. Generational accounting considers how much each adult generation, on a per person basis, is likely to pay in future taxes net of transfer p ...
* Pension led funding
Pension Led Funding (PLF) is a financial services product offered in the United Kingdom (UK) that raises funds for businesses based upon the use of pension benefits accrued by owners or directors of the business they control. The money can then b ...
* Pension model For pensions, a reliable Pension model is necessary for system simulations and projections, so it is important to have a sound database for pension system analyses. For an example of a complex pension model see e.g. (Deloitte, 2011).
A pension syst ...
* Pensions crisis
The pensions crisis or pensions timebomb is the predicted difficulty in paying for corporate or government employment retirement pensions in various countries, due to a difference between pension obligations and the resources set aside to fund the ...
* Public debt
A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
* Retirement
Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload.
Many people choose to retire when they are elderly or incapable of doing their j ...
* Retirement age
This article lists the statutory retirement age in different countries.
Background
In some contexts, the retirement age is the age at which a person is expected or required to cease work. It is usually the age at which such a person may be enti ...
* Retirement planning
Retirement planning, in a financial context, refers to the allocation of savings or revenue for retirement. The goal of retirement planning is to achieve financial independence.
The process of retirement planning aims to:
*Assess readiness-to-ret ...
* Social pension
A social pension (or non-contributory pension) is a stream of payments from state to an individual that starts when someone retires and continues in payment until death. It is a part of a pension system of most developed countries, specifically the ...
Specific:
* Bankruptcy code
* Ham and Eggs Movement The Ham and Eggs movement was an old-age pension movement in California during the 1930s. It was founded by Robert Noble, a controversial radio personality, and Willis Allen. It grew out of a pension movement similar to the one advocated by Franc ...
, California pension proposal of the 1930s-40s
* Individual Pension Plan (IPP)
* Pension Rights Center
The Pension Rights Center is a nonprofit consumer advocacy organization established in 1976. Its stated mission is "to protect and promote the retirement security of American workers, retirees and their families."
Background
Karen Ferguson beca ...
* Provident Fund
Provident fund is another name for pension fund. Its purpose is to provide employees with lump sum payments at the time of exit from their place of employment. This differs from pension funds, which have elements of both lump sum as well as monthly ...
* Roth 401(k)
The Roth 401(k) is a type of retirement savings plan. It was authorized by the United States Congress under the Internal Revenue Code, section 402A, and represents a unique combination of features of the Roth IRA and a traditional 401(k) plan. Sin ...
* Universities Superannuation Scheme
The Universities Superannuation Scheme is a pension scheme in the United Kingdom with £89.6 billion under management as of August 2021 (up from £67 billion in 2019). It has over 400,000 members, made up of active and retired academic and aca ...
References
Further reading
*
*Grünewald A. 2021. " From Benefits and Beneficiaries: The Historical Origins of Old-Age Pensions From a Political Regime Perspective." ''Comparative Political Studies''.
External links
US Retirement
UK State pension
*
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