History Of Pension Funds Essay

2534 words - 10 pages

History of Pension Funds

In tradition, welfare of the elderly was the role of the family unit.
However, during the twentieth Century the population began to grow in
the UK and USA and the “elderly became a serious problem that only the
apparatus of the state was able to help” [1] Problems raised when the
state was no longer able to provide support to the elderly due the
elderly becoming older, improvements with medicine, improvements in
general standards of living and so on, which led to the role of
financial institutions. I.e. the creation of pension funds which has
now become one of the largest financial institutions in the USA and
UK.

Information about Pension Funds

Pension plans an “agreement by a sponsor to provide income to
participants upon their retirement.”[2] This is where it uses pension
funds as the financial intermediary to manage the assets and pays the
benefits of a pension plan. Pension funds are typically sponsored by
employers whereby Meir Kohn[3] had looked at an important question:
“Why do workers and firms find it beneficial to enter into this sort
of arrangements?” they have suggested that the employers acts as
financial intermediaries because a firm using a pension plan can use
it as an incentive device as “the pension acts as a performance bond
posted by the worker.” Therefore, it gives the employees the
motivation to work hard and to not quit the job and move on to the
next so easily. As moving to a new job would result in losing what
they have already saved up. An advantage for the firm is that it gives
the “firm a reputation for taking care of its employees” and so the
firm would “find it easier to recruit good workers and to motivate
them.” I am going to look at in particular International Business
Machines Corporation (IBM) pension fund. IBM has mentioned that they
had done an analysis of “over 75 companies on all aspects of their
compensation and benefit plans and program” and their results have
shown that they were offering significantly more to their employees
than most other companies, “In pensions, IBM found that 75% of its
competitors do not offer a pension plan and even fewer offer retire
medical” [4]

IDM is a private pension fund. i.e. an occupational pension fund.
There are two types of pension plans which are defined benefit plan
and defined contribution plan. Under a defined benefit plan, the plan
sponsor promises to make annual payments to qualifying employees
beginning at retirement which uses a formula to do this. It considers
the length of service of the employee and the employee’s earnings. In
a defined contribution plan, the sponsor makes specified contributions
into the plan on behalf of qualifying participants. “On retirement,
the amount accumulated in the account is paid out to the participants
either in cash or as...

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