Definition
A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income.
Pension Fund
A pension fund is a fund that is established by an employer and consists of periodic contributions made by an employee as well as the employer. The retirement funds are invested in stable investment avenues that grow with a period of time. Objective of the pension fund is to build savings for an individual employee that he or she can utilize after retirement.
Explanation of Pension Fund
Pension funds are usually not managed by the company where the employer is employed. The funds are managed by a financial intermediary on behalf of the company. That said some companies prefer to manage the funds in-house. These funds contain large sums of money that are invested in multiple venues.
The characteristics of pension funds differ in every country. In the US, contributions made to qualified pension fund schemes are treated as tax deferred income. Qualified pension funds are those that are specified in Internal Revenue Code Section 401 (a). These include profit sharing plans (401(k)), money purchase pension plans, and benefit plans. Amount contributed in the pension funds are not taxed up to a certain limit. Any gain in the funds is treated as tax deferred and is taxed only when the individual withdraws amount from the fund.
Employees are allowed transfer their contributions either in part or in full to a 401(k) as Roth contributions, which are not tax exempt and are included in gross income. Roth 401(k) pension funds do not have the limitation of withdrawal after a specific age. Individual can withdraw amount in the funds without incurring a penalty.
Amounts in the pension funds are safe from creditors. This protection is given through Employee Retirement Income Security Act of 1974, or ERISA. The act offers protection to all qualified pension funds and include provision of protection of the individuals retirement funds in the event of a bankruptcy.
Every state in the US has its own pension fund schemes such as California Public Employees’ Retirement System (CalPERS), Fire and Police Pension Association of Colorado (FPPA), Illinois Municipal Retirement Fund, Teacher Retirement System of Texas (TRS of Texas), Retirement Systems of Alabama (RSA), Kansas City Public School Retirement System (KCPSRS), Minnesota Teachers’ Retirement Association (MNTRA), and New York State Teachers’ Retirement System (NYSTRS).
Further Reading
- Pension fund capitalism – ideas.repec.org [PDF]
- Pension reform, financial market development, and economic growth: preliminary evidence from Chile – link.springer.com [PDF]
- The economic inefficiency of secrecy: Pension fund investors' corporate transparency concerns – link.springer.com [PDF]
- Is there a link between pension-fund assets and economic growth?-A cross-country study – bura.brunel.ac.uk [PDF]
- Pension funds: retirement-income security and capital markets: an international perspective – ideas.repec.org [PDF]
