Pension
Overview
 
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay
Severance package
A severance package is pay and benefits an employee receives when they leave employment at a company. In addition to the employee's remaining regular pay, it may include some of the following:* An additional payment based on months of service...

; the former is paid in regular installments, while the latter is paid in one lump sum.

The terms retirement plan or superannuation refer to a pension granted upon retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...

. Retirement plans may be set up by employers, insurance companies, the government or other institutions such as employer associations or trade unions.
Encyclopedia
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay
Severance package
A severance package is pay and benefits an employee receives when they leave employment at a company. In addition to the employee's remaining regular pay, it may include some of the following:* An additional payment based on months of service...

; the former is paid in regular installments, while the latter is paid in one lump sum.

The terms retirement plan or superannuation refer to a pension granted upon retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...

. 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
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, they are commonly known as pension schemes in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

 and Ireland
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...

 and superannuation plans or super in Australia
Superannuation in Australia
Superannuation is a retirement program in Australia. It has a compulsory element whereby employers are required by law to pay an additional amount based on a proportion of an employee's salaries and wages into a complying superannuation fund.An individual's superannuation fund can be accessed...

 and New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...

. Retirement pensions are typically in the form of a guaranteed life annuity
Life annuity
A life annuity is a financial contract in the form of an insurance product according to which a seller — typically a financial institution such as a life insurance company — makes a series of future payments to a buyer in exchange for the immediate payment of a lump sum or a series...

, thus insuring against the risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...

 of longevity
Longevity
The word "longevity" is sometimes used as a synonym for "life expectancy" in demography or known as "long life", especially when it concerns someone or something lasting longer than expected ....

.

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 fund pensions. Occupational pensions are a form of deferred compensation
Deferred compensation
Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a date after which that income is actually earned. Examples of deferred compensation include pensions, retirement plans, and stock options...

, usually advantageous to employee and employer for tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

 reasons. Many pensions also contain an additional insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

 aspect, since they often will pay benefits to survivors or disabled beneficiaries. Other vehicles (certain lottery
Lottery
A lottery is a form of gambling which involves the drawing of lots for a prize.Lottery is outlawed by some governments, while others endorse it to the extent of organizing a national or state lottery. It is common to find some degree of regulation of lottery by governments...

 payouts, for example, or an annuity) 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 and/or contractual terms. A recipient of a retirement pension is known as a pensioner
Pensioner
In common parlance, a pensioner is a person who has retired, and now collects a pension. This is a term typically used in the United Kingdom and Australia where someone of pensionable age may also be referred to as an 'old age pensioner', or OAP. In the United States, the term retiree is more...

or retiree.

Employment-based pensions (retirement plans)

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 a 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
Small Self Administered Scheme
Small Self Administered Scheme is a type of UK Occupational Pension Scheme.Schemes are trust-based and established individually, usually by directors of limited companies for specified employees of the company. Since Pension Simplification , SSAS has been available for establishment by those who...

 is a type of employment-based Pension in the UK.

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 in the UK, or Social Security in the USA.
Many countries have also put in place a "social pension". These are regular, tax-funded non-contributory cash transfers paid to older people. Over 80 countries have social pensions.[4] Examples are the Old Age Grant in South Africa and the Universal Superannuation scheme in New Zealand.

Disability pensions

Some pension plans will provide for members in the event they suffer a disability. 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 or defined contribution 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.

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 traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined by a set formula, rather than depending on investment returns. 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.

Traditionally, retirement plans have been administered by institutions which exist specifically for that purpose, by large businesses, or, for government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

 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 2009, then salary in 2004 dollars is averaged with salary in 2005 dollars, etc., with 2004 dollars being worth more than the dollars of succeeding years. The pension is then paid in first year of retirement dollars, in this example 2009 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 United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

, benefits are typically indexed for inflation (known as Retail Prices Index
Retail Prices Index (United Kingdom)
In the United Kingdom, the Retail Prices Index or Retail Price Index is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a basket of retail goods and services.-History:...

 (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 retirees will receive the payouts for longer periods of time. In the United States, under the Employee Retirement Income Security Act of 1974
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...

, 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.

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 (PAYGO or PAYG). 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 funded, with assets managed by the CPP Investment Board
CPP Investment Board
Under the direction of the then Canadian Finance Minister Paul Martin, the CPP Investment Board was created in 1997 as an organization independent of the government to monitor and invest the funds held by the Canada Pension Plan . In turn, the CPP Investment Board created the CPP Reserve Fund. The...

 while the U.S. Social Security
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...

 system is 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. 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
Actuary
An actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms ....

 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 many countries, such as the USA, the UK and Australia
Superannuation in Australia
Superannuation is a retirement program in Australia. It has a compulsory element whereby employers are required by law to pay an additional amount based on a proportion of an employee's salaries and wages into a complying superannuation fund.An individual's superannuation fund can be accessed...

, most private defined benefit plans are funded, because governments there provide tax incentives to funded plans (in Australia they are mandatory). In the United States, non-church-based private employers must pay an insurance-type premium to the Pension Benefit Guaranty Corporation
Pension Benefit Guaranty Corporation
The Pension Benefit Guaranty Corporation is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and...

, a government agency whose role is to encourage the continuation and maintenance of voluntary private pension plans and provide timely and uninterrupted payment of pension benefits.

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
Portability (social security)
The portability of social security benefits is the ability of workers to preserve, maintain, and transfer acquired social security rights and social security rights in the process of transferring from one private, occupational, or public social security scheme to another...

 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
Portability (social security)
The portability of social security benefits is the ability of workers to preserve, maintain, and transfer acquired social security rights and social security rights in the process of transferring from one private, occupational, or public social security scheme to another...

 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.

Examples

Many countries offer state-sponsored retirement benefits, beyond those provided by employers, which are funded by payroll
Payroll tax
Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax , or pay-as-you-go tax...

 or other taxes. The United States Social Security system is similar to a defined benefit pension arrangement, albeit one that is constructed differently than a pension offered by a private employer.

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 [tier] 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
UK pension provision
Pensions in the United Kingdom fall into seven major divisions; Basic State Pension, State Second Pension , Occupational Pensions, Stakeholder Pensions, Group Personal Pensions and Personal or Individual Pensions...

.

Defined contribution plans

In a defined contribution 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, 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
Portability (social security)
The portability of social security benefits is the ability of workers to preserve, maintain, and transfer acquired social security rights and social security rights in the process of transferring from one private, occupational, or public social security scheme to another...

 of defined contribution pensions is legally no different from the portability
Portability (social security)
The portability of social security benefits is the ability of workers to preserve, maintain, and transfer acquired social security rights and social security rights in the process of transferring from one private, occupational, or public social security scheme to another...

 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
Portability (social security)
The portability of social security benefits is the ability of workers to preserve, maintain, and transfer acquired social security rights and social security rights in the process of transferring from one private, occupational, or public social security scheme to another...

.

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 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.

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
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...

s (IRAs) and 401(k) plan
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...

s. In such plans, the employee is responsible, to one degree or another, for selecting the types of investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

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
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...

s to selecting individual stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

s or other securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...

. Most self-directed retirement plans are characterized by certain tax advantage
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...

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.

In the US, defined contribution plans are subject to IRS 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 is $16,500 with a $5,500 catch-up. These numbers may increase each year and are indexed to compensate for the effects of inflation.

Hybrid and cash balance plans

Hybrid plan designs combine the features of defined benefit and defined contribution plan designs.

A cash balance plan
Cash balance plan
A cash balance plan is a defined benefit retirement plan that maintains hypothetical individual employee accounts like a defined contribution plan...

 is a defined benefit plan made by the employer, with the help of consulting actuaries (like Kwasha Lipton
Kwasha Lipton
Kwasha Lipton was an employee benefits consulting firm located in Fort Lee, New Jersey. It was founded in 1944 by H. Charles "Chick" Kwasha and Maurice Lipton....

, who it is said created the cash balance plan) to appear as if they were defined contribution plans. 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 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
Portability (social security)
The portability of social security benefits is the ability of workers to preserve, maintain, and transfer acquired social security rights and social security rights in the process of transferring from one private, occupational, or public social security scheme to another...

 than traditional defined benefit plans and perhaps more attractive to a more highly mobile workforce.

Target benefit plan
Target Benefit plan
A target benefit plan is a type of pension plan that contains features of a defined contribution plan but is made to appear like a defined benefit plan....

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 leaders favor transforming the Social Security system, at least in part, to a self-directed investment plan.

Financing

There are various ways in which a pension may be financed.
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 your pension and save for retirement. Pension plans can be set up by your employer, matching your 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 Canadian’s have the option to open a Registered Retirement Savings Plan
Registered Retirement Savings Plan
A Registered Retirement Savings Plan or RRSP is a type of Canadian account for holding savings and investment assets. Introduced in 1957, the RRSP's purpose is to promote savings for retirement by employees. It must comply with a variety of restrictions stipulated in the Canadian Income Tax Act...

 (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 country’s governments will provide advice on pension schemes.

History

Widows' funds were among the first pension type arrangement to appear, for example Duke Ernest the Pious of Gotha 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.'

Germany

As part of Otto von Bismarck
Otto von Bismarck
Otto Eduard Leopold, Prince of Bismarck, Duke of Lauenburg , simply known as Otto von Bismarck, was a Prussian-German statesman whose actions unified Germany, made it a major player in world affairs, and created a balance of power that kept Europe at peace after 1871.As Minister President of...

's social legislation, the Old Age and Disability Insurance Bill was enacted 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. It is sometimes claimed that at the time life expectancy
Life expectancy
Life expectancy is the expected number of years of life remaining at a given age. It is denoted by ex, which means the average number of subsequent years of life for someone now aged x, according to a particular mortality experience...

 for the average Prussian was 45 years; in fact this figure ignores the very high infant mortality and high maternal death rate from childbirth of this era.
In fact, an adult entering into insurance under the scheme would on average live to 70 years of age, a figure used in the actuarial assumptions included in the legislation.

United States

Public pensions got their start with various 'promises', informal and legislated, made to veterans of the Revolutionary War
American Revolutionary War
The American Revolutionary War , the American War of Independence, or simply the Revolutionary War, began as a war between the Kingdom of Great Britain and thirteen British colonies in North America, and ended in a global war between several European great powers.The war was the result of the...

 and, more extensively, the Civil War
American Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...

. They were expanded greatly, and began to be offered by a number of state and local governments during the early Progressive Era
Progressive Era
The Progressive Era in the United States was a period of social activism and political reform that flourished from the 1890s to the 1920s. One main goal of the Progressive movement was purification of government, as Progressives tried to eliminate corruption by exposing and undercutting political...

 in the late nineteenth century.

Federal civilian pensions were offered under the Civil Service Retirement System
Civil Service Retirement System
The Civil Service Retirement System organized in 1920 and has provided retirement, disability and survivor benefits for most civilian employees in the US federal government. Upon the creation of a new Federal Employees Retirement System in 1987, those newly hired after that date cannot...

 (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
Federal Employees Retirement System
The Federal Employees Retirement System is the current retirement system for employees within the U.S. federal civilian employees...

 (FERS), in 1987.

Pension plans became popular in the United States during World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

, 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
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 to encourage responsible retirement planning by...

 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.

Current challenges

A growing challenge for many nations is population ageing
Population ageing
Population ageing or population aging occurs when the median age of a country or region rises. This happens because of rising life expectancy or declining birth rates. Excepting 18 countries termed 'demographic outliers' by the UN) this process is taking place in every country and region across...

. 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 government and public sector
Public sector
The public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...

 pensions could collapse 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
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...

 and Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...

, where the pension system is forecast to be solvent
Solvency
Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term...

 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. 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 aging 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
Bradley Belt is the former executive director of the Pension Benefit Guaranty Corporation in the United States, and an expert on retirement security and its impact on financial markets and the economy. He was appointed by President George W. Bush to replace Steven Kandarian and later resigned on...

, former executive director of the PBGC (the Pension Benefit Guaranty Corporation, the federal agency that insures private-sector defined-benefit pension plans in the event of bankrupment), 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 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.

Pensions by country

General articles on both public and private pension funds by country:
  • Pensions in Canada
    Pensions in Canada
    Pensions in Canada.*Canada Pension Plan*Old Age Security*Quebec Pension Plan*Registered Retirement Savings Plan*Saskatchewan Pension Plan...

  • Pensions in Chile
    Chile pension system
    The Chile Pension system refers to old-age, disability and survivor pensions for workers in Chile. The pension system was changed by José Piñera, during Augusto Pinochets military government on November 4, 1980 from a PAYGO-system to a fully funded capitalization system run by private sector...

  • Pensions in India
    Pensions in India
    There are three major components to the Indian pension system: civil servants pension, the mandatorypension programs run by the Employees' Provident Fund Organisation of India and the unorganised sector pension....

  • Pensions in Norway
    Pensions in Norway
    Pensions in Norway fall into three major divisions; State Pensions, Occupational Pensions and Individual or personal Pensions.- State pensions :...

  • Pensions in Pakistan
    Pensions in Pakistan
    Pensions in Pakistan are provisions which are provided to retired formal sector employees. Because only the retired formal sector mostly benefits from pensions, most of the social schemes and retirement welfare system in the country cover a small proportion of the old-age population, whereas a...

  • Pensions in the United States
  • Pensions in the United Kingdom

Famous examples of pension system
Pension system
-Pension systems in various countries:*ANSES *Superannuation in Australia*Social Security *Canada Pension Plan*Chile pension system*Indian pension system*KiwiSaver *Social security *UK Pension Provision...

s

Some of the listed systems might also be considered social insurance
Social insurance
Social insurance is any government-sponsored program with the following four characteristics:* the benefits, eligibility requirements and other aspects of the program are defined by statute;...

.
  • Argentina:
    • Administración Nacional de la Seguridad Social
      ANSES
      ANSES is a decentralized Argentine Government social insurance agency managed under the aegis of the Ministry of Labor and Social Security. The agency is the principal administrator of social security and other social benefits in Argentina, including family and childhood subsidies, and...

  • Australia:
    • Superannuation in Australia
      Superannuation in Australia
      Superannuation is a retirement program in Australia. It has a compulsory element whereby employers are required by law to pay an additional amount based on a proportion of an employee's salaries and wages into a complying superannuation fund.An individual's superannuation fund can be accessed...

       - Private occupational pensions
    • Social Security
      Social Security (Australia)
      Social Security, in Australia, refers to a system of social welfare payments provided by Commonwealth Government of Australia. These payments are administered by a Government body named Centrelink...

       - Public pensions
  • Canada:
    • Canada Pension Plan
      Canada Pension Plan
      The Canada Pension Plan 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 Age Security...

    • Old Age Security
      Old Age Security
      The Old Age Security pension is a taxable monthly social security payment available to most Canadians 65 years of age or older. As of July, 2011, the basic amount is C$533.70 per month. At tax time, recipients with 2010 incomes over C$67,668 must pay back a portion of their Old Age Security at a...

    • Quebec Pension Plan
    • Registered Retirement Savings Plan
      Registered Retirement Savings Plan
      A Registered Retirement Savings Plan or RRSP is a type of Canadian account for holding savings and investment assets. Introduced in 1957, the RRSP's purpose is to promote savings for retirement by employees. It must comply with a variety of restrictions stipulated in the Canadian Income Tax Act...

    • Saskatchewan Pension Plan
      Saskatchewan Pension Plan
      The Saskatchewan Pension Plan is a voluntary money purchase defined contribution pension plan created by the Government of Saskatchewan. The SPP was created through The Saskatchewan Pension Plan Act . Oversight of the plan rests with the Saskatchewan Pension Plan Board of Trustees. The plan is...

  • Hong Kong - Mandatory Provident Fund
    Mandatory provident fund
    The Mandatory Provident Fund , often abbreviated as MPF , is a compulsory saving scheme for the retirement of residents in Hong Kong...

  • Finland - Kansaneläkelaitos
  • India - Employees' Provident Fund Organisation of India
  • Japan - National Pension
    National Pension (Japan)
    The Japanese national pension is a pension system that all registered residents of Japan, both Japanese and foreign, are required to enroll in. Since January 1, 2010 it has been managed by the Japan Pension Service.-History:...

  • Malaysia - Employees Provident Fund
    Employees Provident Fund
    The Employees Provident Fund also known Malay as Kumpulan Wang Simpanan Pekerja is a Malaysian government agency under the Ministry of Finance. It manages the compulsory savings plan and retirement planning for legally employed workers in Malaysia...

  • Mexico - Mexico Pension Plan
    Mexico Pension Plan
    Mexico reformed its pension system in 1997, transforming it from a pay as you go , defined benefit scheme to a fully funded, private and mandatory defined contribution scheme. The reform was modeled after the pension reforms in Chile in the early 1980s and was a result of recommendations from the...

  • Netherlands - Algemene Ouderdoms Wet
    Algemene Ouderdoms Wet
    The Algemene Ouderdoms Wet is a 1956 Dutch law that installed a state pension, guaranteed for all. This law was a continuation of a 1947 temporary law. The old law was a proposal by Willem Drees and the new one came about when he was prime minister...

  • New Zealand - KiwiSaver
    KiwiSaver
    The KiwiSaver scheme is a New Zealand voluntary long-term savings scheme which came into operation from Monday, 2 July 2007. The main purpose of the KiwiSaver fund is for retirement savings....

  • Singapore - Central Provident Fund
    Central Provident Fund
    In Singapore, the Central Provident Fund is a compulsory comprehensive savings plan for working Singaporeans and permanent residents primarily to fund their retirement, healthcare and housing needs. It is administered by the Central Provident Fund Board, a statutory board under the Ministry of...

  • Sweden - Social Security
    Social Security (Sweden)
    Social security in Sweden consists of various social insurances handled by Försäkringskassan and welfare given out on a need basis by local municipalities.- Child allowance and parental benefit :...

  • United Kingdom:
    • UK pension provision (generally)
    • Self-invested personal pension
      Self-invested personal pension
      A Self-Invested Personal Pension 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 & Customs ....

      s
  • United States:
    • Public employee pensions
    • Retirement plans in the United States
      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 to encourage responsible retirement planning by...

    • Social Security
      Social Security (United States)
      In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...


Market structure

The market for pension fund
Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...

 investments is still centered around the U.K.and U.S. economies. Japan and the EU are conspicuous by absence. As of 2005 the U.S. was the largest market for pension fund investments followed by the UK.

Pension reforms have gained pace worldwide in recent years and funded arrangements are likely to play an increasingly important role in delivering retirement income security and also affect securities markets in future years.

Obtaining survey data on pensions

Numerous worldwide health, aging and retirement surveys contain questions pertaining to pensions. The Meta Data Repository - created by the non-profit RAND Corporation and sponsored by the National Institute on Aging at the National Institutes of Health - provides access to meta data for these questions as well as links to obtain respondent data from the originating surveys.

See also

  • Elderly care
    Elderly care
    Elderly care or simply eldercare is the fulfillment of the special needs and requirements that are unique to senior citizens. This broad term encompasses such services as assisted living, adult day care, long term care, nursing homes, hospice care, and In-Home care.-Cultural and geographic...

  • Financial advisor and Fee-only financial advisor
  • Generational accounting
    Generational accounting
    Generational accounting is a relatively new method of national accounting for measuring redistribution of lifetime tax burdens across generations from social insurance, including social security and social health insurance...

  • Pensions crisis
    Pensions crisis
    The pensions crisis is a predicted difficulty in paying for corporate, state and federal pensions in the U.S. and Europe, due to a difference between pension obligations and the resources set aside to fund them. Shifting demographics are causing a lower ratio of workers per retiree, while retirees...

  • Pension system
    Pension system
    -Pension systems in various countries:*ANSES *Superannuation in Australia*Social Security *Canada Pension Plan*Chile pension system*Indian pension system*KiwiSaver *Social security *UK Pension Provision...

  • Public debt


Specific:
  • Roth 401(k)
    Roth 401(k)
    The Roth 401 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 plan. As of January 1, 2006 U.S...

  • Bankruptcy code
    Bankruptcy Code
    Bankruptcy Code may refer to:*Bankruptcy in Canada*Bankruptcy in the United States or Title 11 of the United States Code *Bankruptcy in China*Bankruptcy in the United Kingdom...

  • Individual Pension Plan
    Individual Pension Plan
    An Individual Pension Plan or IPP is a Canadian retirement savings vehicle. An IPP is a one-person maximum Defined Benefit Pension Plan which allows the plan member to accrue retirement income on a tax-deferred basis...

     (IPP)
  • Universities Superannuation Scheme
    Universities Superannuation Scheme
    The Universities Superannuation Scheme is a pension scheme in the United Kingdom. Its members include academic and academic-related staff in many United Kingdom universities, mainly those that were universities prior to 1992...

  • Provident Fund
    Provident Fund
    Provident fund may refer to:* Employees Provident Fund Organisation of India, India's retirement plan* Mandatory Provident Fund , Hong Kong's retirement plan* Central Provident Fund , Singapore's retirement plan...

  • Ham and Eggs Movement
    Ham and Eggs Movement
    The Ham and Eggs movement was an old-age pension movement in California during the 1930s. It was originally founded by Robert Noble, a controversial radio personality, and William Allen. It grew out of a pension movement similar to the one advocated by Francis Townsend. The Ham and Eggs lobby...

    , California pension proposal of the 1930s-40s
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