A pension is a collective term used to represent a type of transaction made between the present working populations to their own retired population sphere. Further, this includes both funded and unfunded categories.
- The scheme of a funded category is like an accumulation phase, where initially working population makes constant contributions that get summed up in a great amount and accounts as your retirement pension value.
But once you retire the funds the opposite process say the de-cumulative phase and pays out as pension to the retired people for the rest of their lives. The effective and accurate management of funds in this type of pension operating scheme is very important.
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- On the other hand, the unfunded nature is based on the pay-as-you-drive theme and involves an instant transaction between current working people and the similar retired ones.
The accumulation phase is really enriched with positive rewards as you can observe the increasing value of pension fund within this level due to external contributions made to the remaining fund and also from the interest generated from the already existing asset in the fund.
Take, for example, a pension scheme that involves annual contributions of $1500 over 35 years, the asset value will build up to a particular value at retirement and also receive a value due to the interest rate of 5 percent tied to the fund. The interest ratings tagged with the scheme changes periodically and hence, the pension amount also varies.
Types of pension schemes
- Private plan: This can be further classified into two dimensions. This includes whether it is based on any predefined basis or is considered on a person or group basis. The pension received by an individual is always on a funded basis that works on the principle of accumulation. There are options within this fund plan and face the threat of fund under-performance at times.
According to a recent survey, the share of such pensions has risen from 12 to over 25 percent.
- Group plan: These are those schemes that involve sharing of accumulation assets across its generations. Occupational pension schemes are an example of this type.
The retirement money received by a person depends on the investment strategy and asset allocation decision made by pension fund professionals. Moreover, each industry has a specific set of investment management schemes and measurements upon which the pension value depends. Even though these plans are well-regulated, they need to be constantly monitored and managed with adjusted performance measures to avoid any risky situations.