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Pension fund

A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides retirement income.

Pension funds typically have large amounts of money to invest and are the major investors in listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold about USD$6 trillion in assets.[1] In 2012, PricewaterhouseCoopers estimated that pension funds worldwide hold over $33.9 trillion in assets (and were expected to grow to more than $56 trillion by 2020), the largest for any category of institutional investor ahead of mutual funds, insurance companies, currency reserves, sovereign wealth funds, hedge funds, or private equity.[2]

The Australian National Superannuation Scheme, which oversees $2.57 trillion in assets, is the world's largest public pension fund.

Classifications

Open vs. closed pension fund

Open pension funds support at least one pension plan with no restriction on membership while closed pension funds support only pension plans that are limited to certain employees.[3]

Closed pension funds are further subclassified into:

  • Single employer pension funds
  • Multi-employer pension funds
  • Related member pension funds
  • Individual pension funds

Public vs. private pension funds

A public pension fund is one that is regulated under public sector law while a private pension fund is regulated under private sector law.

In certain countries, the distinction between public or government pension funds and private pension funds may be difficult to assess. In others, the distinction is made sharply in law, with very specific requirements for administration and investment. For example, local governmental bodies in the United States are subject to laws passed by the states in which those localities exist, and these laws include provisions such as defining classes of permitted investments and a minimum municipal obligation.[4][5]

How they work

It is important to distinguish difference between Pension plan, funds and firm. A pension plan is a benefits program set up and sustained by an employer or an employee group. They are managed by state or private firms as well as pension funds.[6] Pension funds are financial mechanisms that provide retirement income for employees after their working life. They work by accumulating contributions from employers, and sometimes employees, which are then invested to grow over time. Upon retirement, employees receive benefits, typically calculated as a percentage of their average salary during their working years. For instance, consider a scenario where a pension scheme offers a payment equivalent to 1% of an individual's average salary over the last five years of their employment for each year they served with the employer. Thus, if an employee worked for 35 years at the company and had an average final salary of $60,000, they would be entitled to an annual pension of $21,000. It is important to point out that one cannot usually take early withdraws or loan from pension. Public sector pensions, like the California Public Employees’ Retirement System (CalPERS), often include cost-of-living escalator and can be more generous than private sector pensions. Private pension plans are regulated by federal laws such as the Employee Retirement Income Security Act (ERISA) and are insured by the Pension Benefit Guaranty Corporation (PBGC), which guarantees benefits if a pension plan fails. [7]

How Pension Funds Invest Their Money

Pension funds can make investments into stocks, bond, real estate, and other assets. However, they have to be prudently managed as it represents people retirement plan. For many years, they mainly invest into stable stocks and bond. [8] In order to keep a high returns, with changing market conditions, they started to invest into other assets.[9] Currently, many pension funds are moving away from managing active stock portfolios towards passive investment methods, focusing on index funds and exchange-traded funds (ETFs) that replicate market indices. Additionally, there's an increasing trend to diversify into alternative assets like commodities, high-yield bonds, hedge funds, and real estate.

Newer investment tools for pension funds include asset-backed securities, such as those tied to student loans or credit card debt, which are used to boost returns. Investing to Private equity is also rising in popularity; these are long-term investments in non-public companies, aimed at achieving substantial profits through eventual sales when these companies reach maturity.

Furthermore, real estate investment trusts (REITs) are becoming a frequent choice for pension funds due to their passive investment approach in the real estate sector. Direct investments in commercial properties like office buildings, warehouses, and industrial parks are also prevalent.[10]

Governance

Pension funds are important financial institutions which are managing the retirement savings of millions. Effective governance in these entities is crucial not only to safeguard these funds but also to ensure they meet their future obligations to pensioners. The governance structures, strategies, and practices of pension funds significantly influence their stability, performance, and the trust of their stakeholders. Proper governance ensures that decisions are made transparently and that fund managers are accountable to stakeholders, including employees, retirees, and employers.[11]

According to the OECD Guidelines for Pension Fund Governance[12], the governance structure should clearly identify and separate operational and oversight responsibilities. Every pension fund should have a governing body, accountable to the pension plan members and beneficiaries. This body is ultimately responsible for ensuring adherence to the terms of the arrangement and the protection of the best interest of plan members and beneficiaries. The governing body should also meet minimum suitability standards to ensure a high level of integrity, competence, experience, and professionalism. Additionally, there should be adequate internal controls in place to ensure compliance with the law.

Challenges

Many pension funds have problem with governance. In Hungary, where pension funds are established as not-for profit institutions, there is evidence that the governing body is generally ineffective in looking after the best interest of members. Most funds are established by financial institutions that find it easy to promote their candidates to the fund ‘s supervisory board. Some pension funds in the United States have also been the subject of governance problems too, as well as in other countries.[13]

History of pension funds

First concepts of providing retirement benefits has roots in ancient civilizations such as Rome and Greece. The pension system as we know him, has roots in the 19th century. German Chancellor, Otto von Bismarck, came in 1889 with an first modern pension scheme. His goal was to help older German´s citizens. However, this idea came from the United States of America. In 1875 American Express Company introduced its own pension plan.

During early 20th century pension plans for public employees were growing, which resulted in creating U.S. federal retirement plan, known a Social Security in 1935.After World War II, pension funds became primary tool for providing retirement benefits, which was supported by growth of labour unions. By the 1970s, evolved and became significant member of financial markets, because they were holding large amount of assets. But in 1980s and 1990s pension funds faced significant challenges. Stocks market crash in 1987 and recession in the early 1990s had negative impact on pension funds. Furthermore, demographic shifts and rising life expectancies placed pressure on these funds to sustain retirement benefits over extended durations.[14]

Regulation

In the United States pension plans are regulated mainly by The Employee Retirement Income Security Act 1974(ERISA). It provides framework for the regulation of employee pension and plans which are private pension funds offering.

In 2006 was introduced The Pension Protection Act (PPA). This act come with new funding requirements for defined pension plans. As well as with new rules for calculating plan assets and liabilities.[15]

Pension funds in EU are regulated by Directive 2003/41/EC , also known as the IORP directive. This directive was recasted and adopted in December 2016. It should promote long-term investment via occupational pension funds. Additionally, beneficiaries and members should now be better informed about their entitlements, address challenges faced by occupational pension funds operating across borders, and foster long-term investments in economic activities that boost growth, enhance the environment, and increase employment opportunities.[16]

Largest pension funds

The following table lists largest pension funds by total assets by the SWF Institute.[17]

CountryFundAssets US$ (in billions)Reporting
Period		InceptionOrigin
 AustraliaAustralian National Superannuation Scheme$2568[18]20221992Employer & Employee Contribution
 United StatesFederal Old-age and Survivors Insurance Trust Fund (Social Security)$2557[19]20231935Taxation
 JapanGovernment Pension Investment Fund$1790[20]20202006Non-commodity
 NorwayGovernment Pension Fund of Norway$1356[21]20211990Oil
 United StatesMilitary Retirement Fund$1321[22]20231984Employer Contribution
 United StatesCivil Service Retirement and Disability Fund$1028[23]20231920Employer & Employee Contribution
 United StatesThrift Savings Plan (TSP)$737[24]20221986Employer & Employee Contribution
 CanadaCanada Pension Plan and CPP Investment Board (CPPIB)$570[25]20221965Non-commodity
 NetherlandsStichting Pensioenfonds ABP (ABP)$498[26] (€460)20221922Non-commodity
 South KoreaNational Pension Service (NPS)$462[27]20171988Non-commodity
 Canada (Quebec)Caisse de dépôt et placement du Québec (The Caisse, or CDPQ)$402[28]20221965Non-commodity
 United States (California)California Public Employees' Retirement System (CalPERS)$389[29]20201932Non-commodity
 ChinaNational Social Security Fund$251[27]20152000Non-commodity
 SingaporeCentral Provident Fund$348[30]20191955Non-commodity
 Canada (Ontario)Ontario Teachers' Pension Plan (OTPP)$247[31]20221989Non-commodity
 United States (California)California State Teachers' Retirement System (CalSTRS)$282[32]20211913Non-commodity
 MalaysiaEmployees Provident Fund$226[30]20191951Non-commodity
 NetherlandsStichting Pensioenfonds Zorg en Welzijn (PFZW, formerly PGGM)$183[33] (€162)20221969Non-commodity
 ChileAFP$160[34]20141980Non-commodity
 IndiaEmployees' Provident Fund Organisation (EPFO)$228[35]20191952Employer & Employee Contribution
RussiaRussian National Wealth Fund$125 [38]20202008Oil
 DenmarkArbejdsmarkedets Tillægspension (ATP)$106[36]20231964Employee Contribution
 CanadaOMERS (Ontario)$124[37]20221962Non-commodity
 South AfricaGovernment Employees Pension Fund (GEPF)$112 (ZAR1426b)1996Non-commodity
 BrazilCaixa de Previdencia dos Funcionários do Banco do Brasil (PREVI)$80[38]1904Finance
 United States (Ohio)State Teachers Retirement System of Ohio (STRS Ohio)$79.8[39]20171919Defined Benefit Pension
 FranceAGIRC - ARRCO$70[27]20152001Non-commodity
 IndiaNational Pension System (NPS)$85[40]20212004Non-commodity
 FrancePensions Reserve Fund (France) (NPRF)$56[41]2001Non-commodity
 IrelandNational Pension Reserve Fund (NPRF)$30[42]2001Non-commodity

By country

Australia

Government

Industry (not-for-profit)

[43]

Private

  • ANZ Australian Staff Superannuation Scheme (for employees of ANZ Bank)

Brazil

  • Aceprev
  • Baneses
  • Banesprev
  • Centrus
  • FAPES
  • Forluz
  • Funcef
  • Fundação Banrisul
  • Fundação CESP
  • Fundação Itaubanco
  • Petros
  • PREVI - Caixa de Previdência dos Funcionários do Banco do Brasil[44] (the closed private pension fund for employees of the Brazilian federal government-owned bank)
  • Sistel
  • Valia

Canada

Government

Private

  • Colleges of Applied Arts and Technology Pension Plan (CAAT)
  • Boilermakers Pension Fund Trust
  • Labourers' Pension Fund of Central and Eastern Canada (LIUNA)
  • Teamsters Canadian Pension Plan
  • Telecommunication Workers Pension Plan
  • UFCW Canadian Pension Plan

Chile

China

Greece

Government

  • Public Employees Pension Fund[45]

Private

  • TAPILTAT, the Fund for Mutual Assistance of the Employees of Ioniki Bank and Other Banks, the multi-employer auxiliary pension fund

Hong Kong

India

  • Employees' Provident Fund Organisation – a statutory social security body of the Government of India that administers a mandatory Provident Fund Scheme, Pension Scheme and a death/disability Insurance Scheme. Provident Fund is applicable for employees across all establishments (private as well as government, subject to criteria). EPFO is the largest social security organisation in India with assets well over ₹ 5 lakh crore (US$159 billion) as of 2014.[47]
  • National Pension Scheme – a defined-contribution–based pension scheme launched by the Government of India open to all citizens of India on a voluntary basis and mandatory for the employees of central government (except Indian Armed Forces) who are appointed on or after 1 January 2004. Indian citizens between the age of 18 and 70 are eligible to join.[48]

Iran

Japan

Malaysia

Morocco

Nepal

Netherlands

Norway

Oman

  • Social Protection Fund

Romania

The pension system in Romania is made of three pillars. One is the state pension (Pillar I – Mandatory), the second is a private mandatory pension where the state transfers a percentage of the contribution it collects for the public pension, and the third is an optional private pension (Pillar III – Voluntary).

The Financial Supervisory Authority – Private Pension is responsible for the supervision and regulation of the private pension system.[50]

Saudi Arabia

Serbia

  • The pension system in Serbia is made of three pillars. One is the state pension (Pillar I – Mandatory), where every insured person is obliged to pay contributions from their paycheck, the second is a voluntary state pension, where an uninsured person is voluntarily included in state pension system, and the third is an optional private pension (Pillar III – Voluntary).[51]
  • Pension and disability insurance fund

Singapore

Switzerland

Turkey

Government

Social Security Institution was established by the Social Security Institution Law No:5502 which was published in the Official Gazette No: 26173 dated 20.06.2006 and brings the Social Insurance Institution, General Directorate of Bağ-kur and General Directorate of Emekli Sandığı whose historical development are summarized above under a single roof in order to transfer five different retirement regimes which are civil servants, contractual paid workers, agricultural paid workers, self-employers and agricultural self-employers into a single retirement regime that will offer equal actuarial rights and obligations.

Private

  • Armed Forces Pension Fund[52]

OYAK (Ordu Yardımlaşma Kurumu/Armed Forces Pension Fund) provides its members with "supplementary retirement benefits" apart from the official retirement fund, T.C.Emekli Sandığı/SSK, to which they are primarily affiliated.

In addition to the retirement benefit, OYAK pays "disability benefits" to the members on duty when they become partially or fully disabled as well as "death benefits" to the heirs of the deceased member if the death occurs during the member's subscription to the foundation.

OYAK is incorporated as a private entity under its own law subject to Turkish civic and commercial codes. OYAK, while fulfilling its legal duties, as set in the law, also provides its members with social services such as loans, home loans and retirement income systems.

The initial source of OYAK's funds is a compulsory 10 percent levy on the base salary of Turkey's 200,000 serving officers who, together with 25,000 current pensioners, make up OYAK's members.

Some other Turkish private pension funds:

  • YAPI ve KREDİ BANKASI A.Ş. Mensupları Yardım ve Emekli Sandığı Vakfı
  • AKBANK T.A.Ş. Mensupları Tekaüt Sandığı Vakfı
  • TÜRKİYE GARANTİ BANKASI A.Ş. Memur ve Müstahdemleri Emekli ve Yardım Sandığı Vakfı
  • TÜRKİYE ODALAR BORSALAR VE BİRLİK PERSONELİ SİGORTA VE EMEKLİ SANDIĞI VAKFI
  • TÜRKİYE İŞ BANKASI A.Ş. Mensupları Emekli Sandığı Vakfı

United States

In the United States, pension funds include schemes which result in a deferral of income by employees, even if retirement income provision is not the intent.[53] The United States has $19.1 trillion in retirement and pension assets ($9.1 trillion in private funds, $10 trillion in public funds) as of 31 December 2016.[54] The largest 200 pension funds accounted for $4.540 trillion as of 30 September 2009.[55]

Government

See also

References

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