|
A pension is a steady income paid to a person (usually after retirement). Retirement plans (also known as superannuation) are a product or a method of investing which invests money now to provide for a retirement pension later. Image File history File links Nuvola_apps_browser. ...
A retirement plan is an arrangement to provide people with an income, or pension, during retirement, when they are no longer earning a steady income from employment. ...
Although a lottery may provide a pension, most lotteries today give an annuity for a fixed number of years, like 25 years. Only some lotteries give an annuity for life, like the failed New York State's "Win for Life" lottery, which paid the winner $2000 per week for life. The common use of the term is to describe the payments a person receives upon retirement, usually under pre-determined legal and/or contractual terms. A lottery is a popular form of gambling which involves the drawing of lots for a prize. ...
The term annuity (from Latin annus, a year), in current use in the insurance industry, refers to two very different types of legal contracts with very different purposes. ...
Retirement is the status of a worker who has stopped working. ...
Pensions have traditionally been payments made in the form of a guaranteed annuity to a retired or disabled employee, or to a deceased employee's spouse, children, or other beneficiaries. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labor unions, the government, or other organizations may also sponsor pension provision. The term annuity (from Latin annus, a year), in current use in the insurance industry, refers to two very different types of legal contracts with very different purposes. ...
Types of pensions
Pension plan or retirement plan By such an arrangement an employer (for example, a corporation, labor union, government agency) provides income to its employees after retirement. Pension plans are a form of "deferred compensation" and became popular in the United States during World War II, when wage freezes prohibited outright increases in workers' pay. Combatants Allied Powers Axis Powers Commanders {{{commander1}}} {{{commander2}}} Strength {{{strength1}}} {{{strength2}}} Casualties 17 million military deaths 7 million military deaths World War II, also known as the Second World War, was a mid-20th century conflict that engulfed much of the globe and is accepted as the largest and deadliest...
Pension plans can be divided into two broad types: Defined Benefit and Defined Contribution plans. The defined benefit plan had been the most popular and common type of pension 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.
Some plan designs combine characteristics of defined benefit and defined contribution types, and are often known 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 Section 414 of the Internal Revenue Code says that a defined contribution plan is a pension plan that has individual accounts. All other pension plans are captured under the name of defined benefit plans.
The typical defined benefit plan (as its name implies) defines a benefit for an employee upon that employee's retirement. The benefit in a defined benefit pension plan is determined by a formula, which can incorporate the employee's pay, years of employment, age at retirement, and other factors. A simple example is a flat dollar plan design that provides $100 per month for every year an employee works for a company; with 30 years of employment, that participant would receive $3,000 per month payable for their lifetime. Typical plans in the United States are final average plans where the average salary over the last three or five years of an employees' career determines the pension; in the United Kingdom, benefits are often indexed for inflation. Formulas can also integrate with public Social security plan provisions and provide incentives for early retirement (or continued work). For specific national programs, see Social Security (United States), National insurance (UK), Social Security (Sweden) Social security mainly refers to a field of social welfare concerned with social protection, or protection against socially recognized needs, including poverty, old age, disability, unemployment, families with children and others. ...
Traditional defined benefit plan designs tend to exhibit an S-shaped accrual pattern of benefits, where the present value of benefits grows quite slowly early in an employees' career and accelerates significantly in mid-career. Defined benefit pensions are usually not portable - accrued benefits in defined benefit plans are typically payable only at retirement - even when the employee has a vested interest in the benefit. On the other hand, defined benefit plans typically pay their benefits as an annuity, so retirees do not bear the risk of outliving their retirement income.
The United States Social Security system is an example of a defined benefit pension arrangements, albeit one that is constructed differently than a pension offered by a private employer. Social Security in the United States is a social insurance program funded through a dedicated payroll tax. ...
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 a estimate based on economic and financial assumptions. These assumptions include the average retirement age and life span of the employees, the returns earned by the pension plan's investments and the cost of insurance from the Pension Benefit Guaranty Corporation which is predicted to increase in the near future. So, for this arrangement, the benefit is known but the contribution is unknown even when calculated by a professional. Actuaries (from the Latin verb agere to do, drive) are business professionals who deal with the financial impact of risk. ...
The Pension Benefit Guaranty Corporation (or PBGC) is an independent agency of the United States government created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of voluntary private pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums...
In the US, the Internal Revenue Code (IRC) defines a defined benefit plan [Internal Revenue Code Section 414(j)]. The IRC's definition for the defined-contribution plan is an individual account plan -- meaning that employees/participants own an account. Despite the fact that the participant 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.
Defined Contribution Plans A defined contribution plan, according to the Internal Revenuie Code Section 414 are employer sponsored plans with an individual account for each employee. The accrued benefit from such a plan for an employee must be solely attributed to contributions made into his individual account and investment gains less any losses and expense charges. Plan 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, often through the purchase of an annuity which provides a regular income. Defined contribution plans have become more 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 DB plans in the US has been steadily declining, as more and more employers see the large pension contributions as a large expense that they can avoid by disbanding the plan and instead offering a defined contribution plan. The term annuity (from Latin annus, a year), in current use in the insurance industry, refers to two very different types of legal contracts with very different purposes. ...
Examples of defined contribution plans in the USA include Individual Retirement Accounts (IRAs) and 401(k) plans. In such plans, the employee is responsible, to one degree or another, for selecting the types of investments toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined mutual funds to selecting individual stocks or other securities. Most self-directed retirement plans are characterized by certain tax advantages, 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. An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for saving for retirement in the United States. ...
The 401(k) plan is a type of retirement plan available in the United States. ...
Investment or investing is a term with several closely-related meanings in finance and economics. ...
A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, and/or other securities. ...
See stock (disambiguation) for other meanings of the term stock In financial terminology, stock is the capital raised by a corporation, through the issuance and sale of shares. ...
Security is a type of transferrable interest representing financial value. ...
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. ...
Money contributed can either be from employee salary deferral or from employer contributions or matching. Defined contribution plans are subject to IRS limits on how much can be contributed, known as the section 415 limit. The total deferral amount including the employee and employer contribution is the lesser of $40,000 or 100% of compensation. The employee only amount is $13,000 for 2004 with a $3,000 catch up. These amounts increase in 2005 (to $14,000 and $4,000) and 2006 (to $15,000 and $5,000).
The portability of defined contribution pensions is legally no differebt 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 don't need to pay a actuary to calculate the lump sum equivalent under Section 417(e) that you do for defined benefit plans) in practice, defined contribution plans have become generally portable. Actuaries (from the Latin verb agere to do, drive) are business professionals who deal with the financial impact of risk. ...
In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer. In addition, participants do not typically purchase annuities with their savings upon retirement, and bear the risk of outliving their assets.
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).
Hybrid and Cash Balance Plans Hybrid plan designs combine the features of defined benefit and defined contribution plan designs. In general, they are usually treated as defined benefit plans 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 than traditional defined benefit plans and perhaps more attractive to a more highly mobile workforce. A typical hybrid design is the Cash Balance Plan, where the employee's notional account balance grows by some defined rate of interest and annual employer contribution. A Cash balance plan is a benefit retirement plan that maintains individual employee accounts like a defined contribution plan. ...
In the US, plan conversions from traditional to hybrid plan designs have been controversial, notably at IBM in the late 1990s. Upon conversion, some plan sponsors retrospectively calculated employee account balances -- if the employee's actual vested benefit under the old design was more than the account balance, the employee entered a period of wear away where he or she accrued no new benefits. Hybrid designs also typically eliminated the generous early retirement provisions in traditional pensions. International Business Machines Corporation (IBM, or colloquially, Big Blue) NYSE: IBM (incorporated June 15, 1911, in operation since 1888) is headquartered in Armonk, NY, USA. The company manufactures and sells computer hardware, software, and services. ...
As a result, critics of cash balance plans have seen the new designs as discriminatory against older workers. On the other hand, the new designs may better meet the needs of a modern workforce and actually encourage older workers to remain at work, since benefit accruals continue at a constant pace as long as an employee remains on the job. Court cases have not resolved these problems, and currently there is legislation before the United States Congress to clarify the legal status of cash balance and other hybrid designs.
While the Cash Balance Plan mentioned above is hybrid which is a defined benefit plan designed to mislead workers into thinking is a defined contribution plan (the DB design of CB plans provides the advantage of PBGC insurance but the risk of insolvency]], the Target Benefit plan is a defined contribution plan desgined to look like and targeted to match a defined benefit plan. In a Target Benefit plan, a typical DB design, say 1.5% of salary per year of service times the final 3-year average salary, is used to provide the target. Actuarial assumptions like 5% interest, 3% salary increases and the UP84 Life Table for mortality are used to calculate a level flat contribution rate that would create the needed lump sum at retirement age 65 for each entering employee. The Pension Benefit Guaranty Corporation (or PBGC) is an independent agency of the United States government created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of voluntary private pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums...
The problem with such Target Benefit DC plans is that the flat rate could be low for young entrants, like 8% for a 21 year old, and high for old entrants. This may appear unfair. But the skewing of benefits to the old worker is a feature of most traditional defined benefit plans; and any attempt to match it would reveal this backloading feature.
This points out the key difference among DC and DB plans for ordinary workers -- awareness. The DC plan like the 401k is easy for workers to understand the value of, while the DB plan is typically undervalued by workers until they get really close to retirement age.
Financing There are various ways in which a pension may be financed.
In a funded defined contribution pension, contributions are paid into a fund during an individual's working life. The fund will be invested in assets, such as stocks, bonds and property, and grow in line with the return on these assets. (An unfunded defined contribution pension is an oxymoron.)
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. It has been suggested that this model bears a disturbing resemblance to a Ponzi scheme. A Ponzi scheme is a very risky (and therefore often considered fraudulent) investment operation that involves paying returns to investors out of the money raised from subsequent investors, rather than from profits generated by any real business. ...
In a funded defined benefit arrangement, an actuary calculates the contributions that the plan sponsor must make 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. In the United States, private employers must pay an insurance-type premium to the Pension Benefit Guaranty Corporation, a government agency whose role is to encourage the continuation and maintenance of voluntary private pension plans, provide timely and uninterrupted payment of pension benefits. Actuaries (from the Latin verb agere to do, drive) are business professionals who deal with the financial impact of risk. ...
A growing challenge for many nations is population ageing. As birth rates drop and life expectancy increases an ever-larger portion of the population is elderly. This leaves fewer workers for each retired person. In almost all developed countries this means that the pension system will eventually go broke unless reformed. The two exceptions are Australia and Canada, where the pension system will be solvent 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. In demographics population ageing occurs when the average age of a regions population gets older. ...
Life expectancy is the average number of years remaining for a living being (or the average for a class of living beings) of a given age to live. ...
Pension systems in various countries The Canada Pension Plan (or CPP) is a contributory, earnings-related social insurance program. ...
By law, Australian employers pay a proportion of employees salaries and wages (nine per cent) into a superannuation fund, which can can be accessed when the employee retires. ...
There are three major components to the Indian pension system: civil servants pension, the mandatory pension programs run by the EPFO and the unorganised sector pension. ...
Swedens long-successful economic formula of a capitalist system interlarded with substantial welfare elements was challenged in the 1990s by high unemployment and in 2000-02 by the global economic downturn, but fiscal discipline over the past several years has allowed the country to weather economic vagaries. ...
A retirement plan is an arrangement to provide people with an income, possibly a pension, during retirement, when they are no longer earning a steady income from employment, or an asset from which a person may draw an income from as needed. ...
Social Security in the United States is a social insurance program funded through a dedicated payroll tax. ...
UK Pension Provision falls into three major divisions: State Pensions Occupational Pensions Individual Pensions // State Pensions The state provides basic pension provision to prevent poverty in old age. ...
A Self-Invested Personal Pension (SIPP) is an arrangement within a UK personal pension scheme in which the scheme member has the power to direct how the contributions are invested. ...
Political pensions This is a type sui generis as it is not awarded on grounds of justice, contract or socio-economic merits, but as a political decision, in order to take a politically significant person (often deemed a potential political danger) out of the picture by paying him or her off, regardless of seniority.
In British colonial history, the term political pensioner applies thus to the following former ruling houses of princely states who saw their feudal territories annexed by the HEIC before it transferred power in British India to the Crown in 1858. Although politically important members could be relocated or exiled, they retained throughout the Raj a hereditary right to their former princely rank and titles (in several cases including a gun salute) as well as a monetary "political pension" as a private purse. Only a few years after India's 1947 independence, the nationalist government 'persuaded' most of them to reliquish the annual pension sum on so-called patriotic grounds. For those who continued to receive their payments, the sums were allowed to become a pittance through uncompensated inflation. A princely state is any state under the reign of a prince, both terms being taken in the broad sense. ...
The British East India Company, sometimes referred to as John Company, was a joint-stock company of investors, which was granted a Royal Charter by Elizabeth I on December 31, 1600, with the intent to favour trade privileges in India. ...
In many Indian languages, Raj literally means Prince or Royalty though is often used to mean something more like the English term of empire and as such is often used in reference to the Mughal Raj and the British Raj: the period of direct colonial rule of India by the...
A salute is a gesture or other action used to indicate respect. ...
Similar arrangements were often made later by other governments. Arcot is a town in Vellore District of Tamil Nadu state in southern India. ...
Assam (অসম) is a northeastern state of India with its capital at Dispur. ...
Awadh (also known to the British as Oudh) is a region in the center of the Indian state of Uttar Pradesh. ...
Bengal, known as Bôngo (Bengali: বঙà§à¦—), Bangla (বাংলা), Bôngodesh (বঙà§à¦—দেশ), or Bangladesh (বাংলাদেশ) in Bangla (Bengali), is a region in the northeast of South Asia. ...
A coffee plantation in Coorg Kodagu (previously called Coorg) is a district of Karnataka state, India. ...
Raigad District is a district in the Indian state of Maharashtra. ...
Map showing kurnool district Kurnool is a city in Andhra Pradesh state of southern India - population 267,739 (agglomeration 320,619) (2001 census). ...
Machilipatnam, also known as Masulipatnam or Bandar, is a city on the southeastern or Coromandel Coast of India. ...
Murshidabad is a district of the state of West Bengal, India. ...
NÄgpur City name is derived from River Nag which flows through the city. ...
Portrait of Duleep Singh by Franz Xaver Winterhalter Duleep Singh (Lahore, 6 September 1838 - Paris, 22 October 1893) was the last Maharaja during the Sikh Raj of Punjab. ...
Satara is a town and district of Maharashtra state of India. ...
Surat (Gujarati:સà«àª°àª¤) is a port city in the Indian state of Gujarat and administrative headquarters of the Surat District. ...
Thanjavur, also known as Tanjore, is a city in Tamil Nadu, in southeastern India. ...
See also This page is a candidate to be copied to Wiktionary. ...
A retirement plan is an arrangement to provide people with an income, or pension, during retirement, when they are no longer earning a steady income from employment. ...
Sources and External links
Agencies - Pension Benefit Guaranty Corporation (PBGC)
Research on Pensions Pensions and Capital Stewardship Project at the Labor and Worklife Program, Harvard Law School Harvard Law School (HLS) is one of the professional graduate schools of Harvard University. ...
Articles |
Feeds |
Contact