Pension Benefits and Pension Plans

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The Social Security Retirement Guide written by Jim Blair is your essential guide to the process of claiming the money that is owed to you upon retirement. Many people begin this process with no knowledge of how it works and how complicated it can be, and quickly resign themselves to the easiest option given to them, which can mean losing out on a considerable sum each month. All you need to do is look through the guide to find the section which applies to you, and follow the steps to determine how much you are entitled to, and what kind of option will get you the best deal. Your purchase includes an instant download of the ebook The Social Security Retirement Guide, and includes access to all future editions. As soon as the guide is updated, you will be emailed so that you can keep up to date with any changes to social security rules, so you are never at risk of missing out on the money that you are rightfully owed.

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Framework for Public Pension Fund Management

Public pension schemes, or social security schemes, as they are known in some countries, have long been recognized as having major economic and social implications. In addition to their obvious social welfare objective of providing adequate retirement incomes for the aged, public pension schemes can influence economic performance and capital accumulation through their effect on taxes and intergenerational transfers. For many countries, the implicit liability to finance public pensions is by far the most significant unrecognized liability in their public accounts. The debate over public pensions was in the 1970s and 1980s predominantly about whether or not such schemes should be funded by the 1990s it had shifted to how best to organize the funding. Given the adoption by many countries of a funding program, it is appropriate that the focus should now shift to how public pension funds should be managed. The debate at this point is largely about governance, broadly defined. There is no...

Governance of Public Pension Schemes

Governance of public pension schemes is a specific application of the more general subject of public sector governance. This section looks first at the general issues of public sector governance, then applies the relevant principles to public pension management. As noted by Carmichael (2002), the need for high standards of public sector governance arises from the same types of issues that give rise to the need for strong corporate governance. Namely, in acting on behalf of its citizens the government creates a principal agent problem for its citizens. The difficulty in resolving the public sector principal agent problem is that, in most instances, there is no ready metric by which the agents can measure the performance of the principals. However, provided there is adequate transparency for the scheme, this should be much less of a problem in the case of public pension schemes than it is in areas such as regulation, public policy, or law enforcement. A second difficulty in resolving...

Accountability of Public Sector Pension Schemes

Laying a Foundation for Public Pension Scheme Accountability The main role of transparency in the case of unfunded schemes is to reveal to taxpayers the likelihood of their retirement being funded at a suitable level from the government's budget. This requires either explicit recognition of the pension liability in the government's accounts or periodic disclosure by the government of trends in longevity and retirement incomes and their implications for future budgets. An example of such a disclosure is the analysis published by the Australian government in its 2003 budget papers projecting the impact of trends in longevity and fertility on public pensions and consequently on forward budgets.15 In the case of contributory schemes, transparency requirements should go well beyond budgetary projections, which provide information about the financial strength of the guarantor but not about the financial strength of the fund. The ultimate safeguard for pension investors in these cases is...

Consider retirement account funding

If you're not taking advantage of your retirement accounts (such as 401(k)s, 403(b)s, SEP-IRAs, and Keoghs), you may be missing out on some terrific tax benefits. Funding retirement accounts gives you an immediate tax deduction when you contribute to them. And some employer accounts offer free matching money but you've got to contribute to earn the matching money.

Tax Deferred Retirement Plans

Do you own an IRA retirement plan If so, you may be able to invest all or part of it in real estate. Unfortunately, most people believe that they can only invest these retirement funds in corporate America's stocks, bonds, mutual funds, or money market accounts. Wrong Patrick Rice fully explains these real estate investing techniques in his book, IRA Wealth Revolutionary IRA Strategies for Real Estate Investment (Garden City Park, N.Y., Square One, 2003, p. 3). Here's what Rice says After the sharp decline of the stock market, many of us could only stand by and watch as our retirement savings lost their accumulated value. Few investors knew that there was an alternative which offered both safety and growth. That alternative is real estate. . . . Contrary to what you may have believed, it is possible and perfectly legal to hold real estate in an IRA account and to enjoy unprecedented returns. If you have built up funds in a tax-favored retirement fund, I urge you to talk with a...

Governance of Public Pension Funds Lessons from Corporate Governance and International Evidence

Governments are paying increasing attention to the management of their public pension fund reserves. Rather than cutting benefits or increasing contributions to enlarge these reserves, they are focusing on the more politically appealing alternative of improving their investment performance (Palacios 2002). They are, however, facing growing pressure to use these funds to improve the local economy or achieve other social goals, and such use obviously can have a significant negative impact on investment performance. There consequently is a strong need for public pension reform to focus on the governance structures and practices of these funds. A leading theory used to analyze corporate governance and provide prescriptions on governance structures and incentives is the agency theory. This paper examines the applicability of this theory to the governance of public pension funds. The first section discusses the application of agency theory to corporations. Included in this discussion is the...

Who Are Public Pension Fund Stakeholders

To develop an understanding of the appropriate governance structure of public pension plans it is necessary first to identify the stakeholder groups and their interests. The three key stakeholder groups relevant to this analysis are the plan participants, the government, and the taxpayers. The plan participants group includes active members (the current contributors), retired members (those currently receiving benefits), and survivors and dependents of plan participants. The membership of this group can be broad or limited, depending on whether the pension plan is a national scheme or a specific civil service group. This stakeholder group clearly has the most direct interest in the pension system's performance (Mitchell 2002). In the United States and the United Kingdom, the law governing private pension plans requires that the plans be managed solely in the best interests of participants and beneficiaries. This stakeholder group has an interest in the amount of their benefits, in the...

Parisian Retirement

Bruce has visited France numerous times and long ago decided that Paris is one of the great cities of the world. Rather than just dream about it, Bruce has an enviable twenty-year plan buy a cash-flowing property in Paris with Roth IRA funds, and upon retirement in two decades, move into it.

Ownership and Control in Private Pensions

Recent work by Besley and Prat (2002) applies agency theory to private pension fund governance. Their goal was to find the optimal governance structure of defined contribution (DC) and defined benefit (DB) pension plans with respect to three potential sources of agency problems the responsibility for monitoring the asset manager (vigilance), asset allocation decisions, and the plan's level of funding. Governance structure matters because, due to the inability to exactly specify the obligations of all parties, the plan's beneficiaries and sponsor do not have complete contracting ability. Thus, the incentives are important that encourage the parties to monitor or make appropriate asset allocation decisions. The optimal governance structure is one in which the risk-bearer is also the decision-maker (that is, there is no separation of ownership from control). impact on the residual claimant. With respect to private pension plans, the identification of the residual claimant is necessary to...

Maximize taxdeferred retirement account savings

It's difficult for most people to save money. Don't make a tough job impossible by forsaking the terrific tax benefits that come from investing through retirement savings accounts. Employer-based 401(k) and 403(b) retirement plans offer substantial tax benefits. Contributions into these plans are federal and state tax-deductible. And once the money is invested inside these plans, the growth on your contributions is tax-sheltered as well. The common mistake fund investors make is that they neglect to take advantage of retirement accounts in their enthusiasm to invest in funds in non-retirement accounts. This can cost you hundreds, perhaps thousands, of dollars per year in lost tax savings, and tens of thousands to hundreds of thousands of dollars over your working years. Fund companies are happy to encourage this financially detrimental behavior. It's not detrimental to them. They lure you into their funds without educating you about using your employer's retirement plan first. Why...

Restrictions on Retirement Fund Investing

First, as mentioned earlier, the owner of the IRA must be eligible to invest in the hedge fund. Second, the owner of the retirement assets must find a way to effect the investment. For example, an IRA investor must find a trustee willing to let the owner make a hedge fund investment and must have the balance in a self-directed account. A 401(k) investor must work for a company that is willing to add one or more hedge funds to the list of eligible assets. Third, the investor must cope with a hedge fund industry that is hesitant about taking retirement money into their funds. IRA accounts, Keogh funds, and other self-directed retirement plans are all considered benefit plan investors under the Employee Retirement Income Security Act of 1974 (ERISA see Chapter 8). Hedge funds almost universally limit plan assets to less than 25 percent of the fund to avoid being regulated as a pension fund. Some funds of funds have recently started turning down investments from retirement accounts,...

Implications for the Governing Body of Public Pension Plans

Public pension funds thus clearly need a strong governing body. Compared to corporations, for which there are available a variety of external and internal control mechanisms, for public pensions the board is essentially the only available control. The following sections provide an initial analysis of the issues that should be addressed when creating a board that has the appropriate incentives to be an effective monitor and manager of a fund. Using Eisenhardt's terminology, these are mostly behavioral rather than outcome controls.

The golden egg investing for retirement

Uncle Sam gives big tax breaks for retirement account contributions. This is a deal you can't afford to pass up. The mistake people at all income levels make with retirement accounts is not taking advantage of them, thereby delaying the age at which they start to sock money away. The sooner you start to save, the less painful it is each year, because your contributions have more years to compound. Each decade you delay approximately doubles the percentage of your earnings you should save to meet your goals. For example, if saving 5 percent per year starting in your early 20s would get you to your retirement goal, waiting until your 30s may mean socking away 10 percent waiting until your 40s, 20 percent beyond that, the numbers get troubling. Taking advantage of saving and investing in tax-deductible retirement accounts should be your number one financial priority (unless you're still paying off high-interest consumer debt on credit cards or an auto loan). Here are the main benefits of...

Pension Fund As Hedge Fund Investors

Pension funds or retirement funds include a wide variety of structures created by Congress to encourage U.S. taxpayers to save for retirement. As mentioned earlier, ERISA (see Chapter 8) governs IRAs, 401(k) plans, Keoghs, plus defined benefit plans and defined contribution plans. The individually directed plans are discussed earlier in this chapter along with other types of individual investments in hedge funds. This section discusses traditional company-sponsored pension plans. A defined contribution plan is a pension plan where the employer or employee makes contributions to the pension accounts of eligible workers. Workers may have some input as to how the pension balance is invested. More importantly, the worker bears all of the investment risk, enjoying a growing account balance when returns are good and suffering losses when performance is bad. Importantly, the employer makes no commitment to that worker that the pension benefit will be of any particular amount. In a defined...

Tapping into your retirement savings

More and more investors are choosing to set up self-directed IRAs and other types of retirement accounts that enable them to invest in real estate rather than in stocks and bonds. The reasoning behind this is that real estate often provides a better and sometimes even more secure return on your investment. With a self-directed IRA, you can buy and sell properties out of your retirement account. Setting up a self-directed IRA, however, is no simple matter. Typically, a trust company manages the money and properties in the account, and all profits and losses from your investments must stay in that account. Withdrawing money from the account results in the same IRS penalties you have to pay if you withdraw money from any type of retirement account. Consult your financial advisor and accountant for details about using a self-directed IRA to finance your foreclosure investments. If a self-directed IRA is not a viable option, you may be able to borrow money against your retirement account....

Transparency and Accountability of Public Pension Funds

The collapse last year of Enron, WorldCom, and Andersens appalled investors all over the world. Millions of people saw their savings and pensions vanish. While these highest-profile failures were all located in the United States, many other countries had their share of similar, if smaller, collapses. Structures, standards, and regulations can never be a complete defense against individuals determined to do wrong, nor can they wholly protect against a culture of corporate greed and loose ethics. They are nonetheless our best assurance that savers, investors, and employees are protected from problems of this kind. Also in July 2002, the Organization for Economic Cooperation and Development (OECD) published its Guidelines for Pension Fund Governance. The guidelines were developed as part of an OECD project on financial governance and draw inspiration from the existing OECD Principles of Corporate Governance. The adoption of an EU Pensions Directive to harmonize the activities of...

Pledged Retirement Accounts

In terms of popularity, Elmer Frank adds,Retirement accounts have become one of the most frequent sources of pledged collateral for our firsttime home buyers. We don't even require that the account belong to the buyers. We'll accept funds from any close family member. On no-down-payment mortgages, we usually like to see 30 percent, but for good customers, we've gone as low as 20 percent.

Allocating assets for retirement and other longterm goals

If you're like most people and retire in your mid 60s, your retirement portfolio will need to fund your living expenses for 20 or more years. That's a tall order. Unless you have vast wealth in comparison to your spending desires, the money you've earmarked for retirement will need to work hard for you. That's why a retirement portfolio, particularly during your earlier working years, should be heavily weighted toward growth investments like stocks. _ w Your current age and the number of years you must wait until you retire should be the biggest factors in your retirement asset allocation decision. IlOsB The younger you are and the more years you have before retirement, the more comfortable you should be with growth-oriented (and more volatile) investments, such as stock funds. As you approach retirement age, however, you should gradually scale back the risk and volatility of your portfolio. That's why, as you get older, bonds should become an increasingly bigger piece of your...

National Pensions Reserve Fund Act 2000

The National Pensions Reserve Fund Act provided for the establishment, financing, investment, and management of a fund to meet part of the escalating exchequer cost of social welfare and public service pensions from 2025 onward. In 2025, according to demographic projections, the proportion of people aged over 65 in the population will start to rise significantly. The act provides for The establishment of a National Pensions Reserve Fund, to provide toward the exchequer cost of social welfare and public service pensions from 2025 onward. A statutory obligation to pay a sum equivalent to 1 percent of GNP from the exchequer into the fund each year until at least 2055, with provision for the payment of additional sums into the fund by resolution of Dail Eireann (Irish House of Parliament). The establishment of the independent National Pensions Reserve Fund Commission to control and manage the fund. The commission will have discretionary authority to determine and implement an investment...

Retirement Plan Wake Up Call

I am currently an employee with the State of California and have the ability to start setting aside trading capital in a 457 plan with Charles Schwab at the rate of 1000 per month. I am considering purchasing the Turtle Trader course. My concern is that although the tax benefit is huge, I will not be able to do any short selling or trade anything that is not on a cash up front basis. For options trading I am restricted to writing covered calls and buying puts against long positions. Since the putting 1000 a month into a self directed retirement plan cuts my taxable income almost in half, it seems pretty great, but if the restrictions force me into a long-term buy and hold investment strategy My basic question is this Can I effectively trade the Turtle system with these restriction and if so, how much will I be hampered by not being able to short sell on a margin account. Would I be better off just paying the taxes and putting the money into a margin account with a discount broker A...

Employee Retirement Income Security Act Of 1974

The Employee Retirement Income Security Act (ERISA) regulated qualified retirement accounts in the United States, including pension funds, various types of individual retirement accounts (IRAs), Keogh plans, simplified employee pension (SEP) plans, and other tax-deferred accounts. These retirement accounts are sometime called plan assets. Not surprisingly, hedge fund managers avoid being classified as managers of plan assets. If plan assets comprise 25 percent or more of a hedge fund, the hedge fund is deemed to be plan assets and the manager and the fund are controlled by ERISA. Hedge funds monitor the portions of their funds attributable to plan assets and most managers reserve the right to return any money to investors if the investment puts them at risk of being regulated as a pension fund.

Controlling Longevity Risk in a Retirement Portfolio

Traditionally, Social Security and defined-benefit (DB) pension plans have provided the bulk of retirement income. However, fewer workers are covered by defined-benefit pension plans today than twenty years ago. While current retirees receive 69 percent of their retirement income from Social Security and traditional company defined-benefit pension plans, today's workers can expect to have only about one-third of their retirement income funded by these sources (see figure 15.1). Increasingly, workers are relying on their defined-contribu-tion (DC) retirement portfolio and other personal savings as the primary resources for retirement income. The shift in retirement funding from professionally managed defined-benefit plans to personal savings vehicles indicates that investors increasingly need to make their own decisions about how to allocate retirement savings and what products to choose to generate income in retirement. In this chapter, we investigate the risk factors investors face...

Risk Factors in the Retirement Portfolio

U.S. investors typically have two goals in retirement. The primary goal is to ensure a comfortable lifestyle. In other words, investors would like to enjoy roughly the same (or better) lifestyle in retirement. Second, they would like to leave some money behind as a bequest, if possible. In making saving and investment decisions for their retirement portfolios, investors must confront three important risk factors financial market risk, longevity risk, and the risk of not saving enough. Financial market risk, or volatility in the capital markets, causes portfolio values to fluctuate up and down. If the market drops during the early part of retirement, the portfolio may not be able to cushion the stress of the subsequent systematic withdrawals. Because of this, the portfolio may be unable to generate the necessary income for the desired lifestyle, or it may simply run out of money too soon. Investors often ignore financial market risk by assuming a constant rate of return from their...

Getting ready for retirement Over 40 and either single or married

Devote some time and effort (with a financial planner if necessary) to calculating what your potential financial needs will be at retirement time. This step is critical in helping you decide what age to target for financial independence. (What's that I can stop working Yee-Ha )

Stochastic Programming Models Applied To Hedge And Pension Fund Problems

Let's now discuss how stochastic programming models may be applied to hedge fund pension fund problems as well as the asset-liability commitments for other institutions such as insurance companies, banks, pension funds and savings and loans and individuals. These problems evolve over time as follows

Lotin retirement Noel and Patricia

Together, they want about 4,500 per month to live on. Social Security provides 1,500 per month, and Noel's pension plan kicks in another 1,500 per month. That leaves an extra 1,500 per month that must come from their 400,000 nest egg, currently comprised of Recommendations A good portfolio for a retiree must not only provide an income for today's expenses but also protect income for the years down the road. Noel and Patricia are managing to get by on the current income from their investments, but with only 20 percent of their nest egg invested for growth in stocks, they have left themselves quite exposed to the ravages of inflation. Their retirement could easily last another 25 plus years. Unless they allocate their assets more aggressively, their nest egg may not last that long. They can accomplish all their goals if they are able to boost their returns from 6 percent to 8 percent (you have to crunch some numbers to figure out where you stand in terms of retirement planning see...

Retirement account applications

Individual Retirement Accounts (IRAs) tire among the most common accounts you might use at a mutual fund company. This section explains what you need to know to complete an IRA application (SEP-IRAs for the self-employed are quite similar). I use the T. Rowe Price mutual fund IRA application as an example (see Figure 11-5). If you plan to transfer money from a retirement account held elsewhere into the one you're opening, you need to be careful about two details before you start u* Make sure that the retirement account type you're opening (such as an IRA or SEP-IRA) matches the type you're transferring (unless you're moving money from a 401(k) plan, in which case you would be sending that money into an IRA account because you can't open a 401 (k) as an individual). V If you want to transfer individual securities from a brokerage account, you need a brokerage account application for whatever type of retirement account you're opening, not a mutual fund account application. to open an...

Stuff to do before transferring retirement accounts

If you have money in a retirement account in a bank, brokerage firm, other mutual fund company, or in a previous employer's retirement plan, you can transfer it to the mutual fund(s) of your choice. Here's a list of steps for transferring a retirement account. Note If you're doing a rollover from an employer plan, please heed the differences indicated Unless you check the box below, you can use the tclcphone computer to nuke exchanges between Identically registered T. Rowe Price IRA accounts. Anyone who can property identify your accounts can make telephone computer exchanges on your behalf. Establishing retirement accounts when you're pressed for time V Go to your local bank. Establish your retirement account in a savings or money market type of account at the bank. Latei, when the dust has settled and you have breathing room, call your favorite fund company for its application and transfer forms to move the money. Bank employees will more than likely try to talk you into a CD or one...

Retirement account transfer forms

Transferring retirement accounts generally isn't too much trouble. In most cases, all you need to do is complete a transfer form. You can use a mutual fund transfer form to move money that's in a bank account, in another mutual fund, or in a brokerage account. You may only use this form to move investment money that you want liquidated and converted to cash prior to transfer.

Distinguishing Public Sector Pension Plans from Other Plans

To avoid confusion, it is useful to distinguish between three types of pension plans private sector-sponsored plans, public sector-sponsored, and government-sponsored. Private sector-sponsored pension plans are employment-based plans established by firms such as IBM, General Motors, and AT& T. Public sector-sponsored defined benefit pension plans cover employees working for federal, state, and local governments. Government-sponsored pension plans are countrywide, compulsory programs such as the Social Security Retirement System in the United States and the Canada and Quebec Pension Plans in Canada. There is additionally a fourth category of pension plan that may be included with private sector plans plans established by nonprofit organizations, including colleges, universities, and nongovernmental agencies. Table 8.1 Sources of Assets for U.S. Retirement System, 2001 Table 8.1 Sources of Assets for U.S. Retirement System, 2001 In some studies, the term public sector plan refers to...

Importance of US Public Sector Pension Plans

Some 28 percent of the more than US 10 trillion of U.S. retirement assets is in public sector pension funds, including some US 2.2 trillion that is in funds that manage assets on behalf of state and local government employees (see Table 8.1). With 90 percent of state and local government employees participating in defined benefit plans, it is reasonable to conclude that about 90 percent of the US 2.2 trillion comprises assets that are being managed in defined benefit plans.3 This means that assets in public sector pension defined benefit plans are roughly equal in value to the total assets in all private sector defined benefit plans, which in 2001 totaled US 1.9 trillion. While their cumulative assets may be equal, individual public sector pension funds are on average larger than their corporate counterparts. For example, nine of the 10 largest U.S. pension funds cover state employees, with California teachers and state employee pension funds having combined assets of more than USS...

The Retirement Annuity

Retirement annuity Stream of cash flows available for consumption during one's retirement years. We can easily obtain your retirement annuity from Spreadsheet 18.1, where we have hidden the lines for ages 32-34, 36-44, 46-54, and 56-64. You can obtain all the spreadsheets in this chapter from the Web page for the text http www.mhhe.com bkm.

Pension Plans and the Balance Sheet

Now remember we said that pension plans are off-balance-sheet financing, and in PepsiCo's case, the 4.245 billion in assets and 5.214 billion in liabilities are not recognized on the balance sheet. Therefore, typical debt ratios like long-term debt to equity probably do not count the pension liability of 5+ billion. But it's even worse than that. You might think the net deficit of - 969 million would be carried as a liability, but it is not. Again, from the footnotes

The History Of Retirement

The notion of retirement really didn't have a big impact on America until after World War II. At that point, people would give 30 to 40 years of their lives to one company, who in return, would pay workers good salaries and generous pensions once they stopped working. In that way, companies were very paternalistic toward their employees. The employees were also very dedicated to their employers. Working until you were 65, quitting, and then enjoying your pension income was the common thing to do. People looked forward to the time when the company that they had worked so hard for would begin to take care of them. But, during the later stages of the twentieth century, that notion became radicalized. No longer were these companies taking care of the workers who had dedicated their lives to them. More people were finding that they no longer wanted to be chained to their desks. Although they were good at their jobs, they weren't being fulfilled, plus, they had the financial security to...

The Biggest Hazards Of Retirement Planning

Setting goals is easy following through on them is more difficult. Remember what I said about setting big goals and little goals Many times, I've found that people set their sights too high, only to see themselves fall short of their goals. It's not because they failed, entirely, to reach these goals it's because they didn't break down their goals, and became overwhelmed. Smaller hills are easier to climb than very tall mountains. Therefore, break down your large mountainous dream into smaller, more attainable foothills. By doing this, you'll be more apt to follow through on your goals and reach them. Another hint is to make sure that your larger goals are also realistic. While having 5 million set aside for retirement is a very There are other pitfalls of retirement planning, including starting late, investing too conservatively, and investing too little. While one of these is enough to stunt the growth of your retirement fund, a combination of all three will kill it. I've always...

Estimating Your Retirement Needs

Once you have set your goals and you have started to form a clear picture of what you would like to do during your retirement, you need to figure out how much money you will need to live on. If only that was all there was Unfortunately, our economy isn't static, and will be subject to many fluctuations between now and when you begin your retirement. That means that not only do we not know how the stock markets will perform, but we also don't know what kind of inflation we will face over the next few years. It could be that inflation is rather stagnant, or we could see a period of high inflation. Regardless, you need to make sure that you are prepared for your retirement. Although the future is characterized by so much uncertainty, that's no excuse for putting off retirement planning. There are a couple of ways to estimate your needs. The first is a more expense-driven method, while the second is a needs-and-wants method. The expense-driven method asks you to estimate the percentage of...

Funding Your Retirement

Once you've figured out how much money you will need to fund your retirement, the question becomes, Where will that money come from To answer this, you will need to estimate what your annual income will be during retirement. Currently, the two main sources of retirement income are social security and employer-sponsored pension plans. However, unless you will be retiring in the very near future (20 years or fewer), you may not be able to rely on social security as a guaranteed income stream. But what about pensions These days people are changing jobs more frequently, which causes them to have smaller pensions, or no pensions at all. Plus, companies are phasing out pensions to help cut costs. What I've found is that most people cannot count on pensions. And, unless the Social Security Administration figures out how to continue funding the social security trust funds, people won't be able to rely on that, either. See Figure 14.1) In fact, many people in their 20s and 30s don't even...

Cash Contributed to the Pension Is Not Pension Cost

Now we have enough understanding to take a look at why cash contributed to the pension plan bears little if any--resemblance to the pension expense (also known as pension cost) that is reported on the income statement and reduces reported earnings. We can find actual cash contributed in the statement of cash flows

Retirement Fund Withdrawals and Form 1099R

Someday, hopefully not before you retire, you'll need or want to start enjoying all the money that you will have socked away into great mutual funds inside your tax-sheltered retirement accounts. The following sections explain what you need to know and consider before taking money out of your mutual fund retirement accounts.

Components of pension expense

Pension expense Pension expense Pension expense (a.k.a. Pension Cost) is reported on the income statement, and reduces reported earnings The first two components of pension expense service and interest cost--are identical to those found in the calculation of PBO. The next component is expected return on plan assets. Recall that the fair value of plan assets includes actual return on plan assets. Expected return on plan assets is similar, except the company gets to substitute an estimate of the future return on plan assets. It is important to keep in mind that this estimate is an assumption the company can tweak to change the pension expense. Finally, the two amortization items are again due to the effects of smoothing. Some people have gone so far as to say the pension expense is a bogus number due to the assumptions and smoothing.

Individual Retirement Arrangements

Most people are familiar with individual retirement arrangements, or IRAs. However, they may not be as familiar as they should be. An IRA is a powerful tool that will help you save money for your retirement, as well as shelter some of your money from taxes. Similarly, many people assume that an IRA is a specialized type of investment, perhaps a specific mutual fund or stock in which all IRA owners are invested. Not so. An IRA is strictly a type of account it's a category of accounts, not a specific investment. In fact, an IRA can hold stocks, bonds, real estate, annuities, or any type of investment you can think of. The types of IRAs, including the traditional and the Roth, are designed to promote retirement saving. With the introduction of the Roth IRA in 1998, retirement saving got a real boost because the Roth offers specialized tax features that no other type of retirement account does. Until recently, the annual contribution limit was 2000. This really didn't allow the IRA...

Growing Your Money During Retirement

There's really no other secret than that. Of course, I always take my clients' risk tolerance into account as I am managing their money. As my clients get older, their portfolios should adapt to their changing needs. Some financial planners believe that if a client is older when he or she begins retirement planning, that the client needs to be invested more aggressively. To a certain extent that is true. However, Modified AGI* If you are covered by an employer-sponsored If you are not covered by an employer-sponsored retirement plan and your tax filing status is retirement plan and your tax filing status is

Retirement Planning As A Whole

While retirement is just one stage in our lives, it really encompasses everything we do. Retirement planning should be our biggest concern, and first priority, when it comes to financial planning. Especially now that people are living longer, retirement may be a 30-year or 40-year period. This isn't something that should be taken lightly. If you haven't thought about your retirement, now is the time to start. It's never too late to start, but the longer you put off your planning, the worse off you could be. I've yet to meet anyone who has told me that they wanted to retire early, but were unable to, and that that was a good thing. No one wants to retire any later than necessary. By saving and investing your money now, you stand a greater chance of fulfilling your retirement dreams. Sure, it takes a bit of discipline, but are things that come easily really worth having * * Reference for this chapter Planning For Retirement Needs, Fifth Edition, by David A. Lit-tell and Renn Beam...

Whats Different about Pension Funds

Preface Pension plan, as used in this chapter, will refer only to defined-benefit pension plans, not defined-contribution pension plans. A defined-benefit plan is a traditional pension plan, where the benefit is defined as an annuity X a month for the rest of our life or a cash balance pension plan, where the benefit is defined as a lump sum. In either case, the plan sponsor bears the entire risk or opportunity of investment results. The employee is entirely unaffected. First, what's similar about pension funds and endowments Most things. They both want the highest long-term return they can achieve within an acceptable level of risk. The process of developing their investment policy and asset allocation, and hiring and monitoring managers, is essentially the same, and so are the principles of governance. In fact, almost everything written in the first eight chapters of this book applies to pension funds as well as endowment funds. So what's different (besides the fact that private...

Civil Service Pensions

A potentially far-reaching pension reform for civil servants has been implemented since January 1, 2004. Under the initiative, new entrants to the central government (excluding the armed forces) will be placed on a portable DC scheme that stipulates a 10 percent contribution each from the employer and employee. There is no wage ceiling applied to the contributions. This is a radical change from the current DB system, which does not require employee contributions and is unfunded. The initiative permits Each member has his or her own individual account in a specialized pension organization which is separate from the government. There will be a central record-keeping-cum clearing agency (CRA) which is to be appointed in the second-half of 2004. The scheme will be regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Initially, the PFRDA will regulate the civil service scheme. It is however anticipated that in due course it will regulate the whole pensions sector....

Pension Plan Liabilities

In truth, the promises the pension plan has made to its participants don't really change much from year to year. They change only by the amount of additional benefits employees have accrued each year. What changes is the present value of those promises. What do we mean by present value Financial accounting standards say the interest rate assumption should vary each year depending on the change in the prevailing interest rate on corporate bonds. That's the interest assumption that determines the present value of pension liabilities shown in a company's annual report. The Pension Benefit Guarantee Corporation, as an insurance company, uses an interest rate more closely related to the interest rate on long government 'If pension assets fall short and the sponsor becomes insolvent, then the risk falls upon the insurer the federally chartered Pension Benefit Guarantee Corporation. bonds. That results in a much higher present value of pension liabilities. For other purposes, other interest...

Retirement planning software

If you know nothing about your retirement other than that it's something you eventually want to do, it's easy to put off saving for it. Creating a retirement plan is a great way to get yourself motivated to start saving money. Unless you were an applied math major in college, however, coming up with a useful retirement plan by using a pencil and a calculator is a complex task. There are so many factors to consider expected rates of investment return, inflation, tax brackets, savings rates, social security benefits, retirement ages, pension benefits, life expectancies and on it goes. So if you have a computer or access to one, let your computer assist you. Computers are a great tool for retirement planning because they make testing different scenarios easy. Tinker with any variable the inflation rate, for example, or your desired retirement income and you can quickly see how that change affects your whole retirement plan. Before you shell out the 40, though, take a look at some of the...

Supervision of a Public Pension Fund Experience and Challenges in Kenya

I am honored to have been given the opportunity to address this second conference on Public Pension Fund Management. I propose to speak on the experience and challenges of supervising the public pension fund in Kenya. I will dwell particularly on the National Social Security Fund, which is the only public pension fund under the supervision of the Retirement Benefits Authority. I will also briefly touch on our experience in regulating the other types of schemes that exist in Kenya.

The Retirement Benefit

In August 1997 the Kenyan National Assembly enacted the Retirement Benefits Act to address the problems afflicting the industry. The subsidiary Retirement Benefits Regulations were then subsequently passed in 2000 to provide the roadmap for implementation of the Act. The Act created the Retirement Benefits Authority (RBA), which was charged with implementing the Act and overseeing the industry's management and development. Control of the Authority's operations is vested in an independent board of directors with a majority private sector representation and the autonomy to run the industry without undue government interference. The Act itemizes five objectives from which the RBA derives its mandate to regulate and supervise the establishment and management of retirement benefit schemes to protect the interests of members and sponsors of such schemes to promote the development of the retirement benefits sector to advise the Minister for Finance on the national policy for the sector and...

Ownership and Control in Public Pension Funds

The identification of the residual claimant is less straightforward in public pension plans. In the context of civil service public DB plans that are not pay-as-you-go, Murphy and Van Nuys (1994) argue that the residual claimants are the taxpayers. Because benefits are defined, funding problems with the pension plan may fall not on the beneficiaries but on the taxpayers, who must put up funds to cover unfunded liabilities. This argument holds to the extent that benefits paid to plan participants cannot be reduced. If benefits can be reduced, the plan participants (especially those retired members currently receiving benefits) are also residual claimants. In addition, where poor management of the pension plan's assets leads to an increased contribution rate for the plan participants, current plan members also have a status similar to that of residual claimants. One potential difference between beneficiaries and taxpayers, however, is the ability of beneficiaries to more completely...

How Pension Funds Lost in Market Boom

In one of the happiest reports to come out of Detroit lately, General Motors proclaimed Tuesday that its U.S. pension funds are now fully funded on an economic basis. Less noticed was GM's admission that, in accounting terms, it is still a few cents well, 3 billion shy of the mark. Wait a minute. If GM's pension plans were 9.3 billion in the hole when the year began, and if the company, to its credit, shoveled in 10.4 billion more during the year, how come its pension deficit wasn't wiped out in full We'll get to that, but the real news here is broader than GM. According to experts, most pension funds actually lost ground, even though, as you may recall, it was a rather good year for stocks and bonds. True, pension-fund assets did have a banner year. But as is sometimes overlooked, pension funds also have liabilities (their obligations to retirees). And at most funds, liabilities grew at a rate that put asset growth to shame. At the margin, that means more companies' pension plans...

Is InHouse Pension Fund Management the Answer

A few corporations that become disillusioned with their pension fund performance decide to move their money in-house. I doubt that going in-house provides any serious advantage because the problem is still the same. How do you find those few experienced people who know what they are doing and are able to produce excellent performance

Individual Retirement Plans Including IRA 401k Keogh

Individuals may invest money held in retirement accounts in hedge funds. The owner of the retirement account must meet the same net worth and income requirements that investors who invest in hedge funds outside a retirement account must match. The retirement account does not need to be large enough to satisfy the net worth requirements for accredited investor, qualified eligible participant, or qualified purchaser (see Chapter 8) as long as the assets of the individual (both in and out of retirement accounts) are sufficient. The mechanisms for investing in hedge funds differ slightly, depending on the type of retirement plan in question. For example, individual retirement account (IRA) money must be held in a self-directed account (basically a brokerage account designed for IRA investing) and must find an institution willing to act as trustee for the account. A corporation administering a 401(k) plan may make a hedge fund option available to plan participants. In each of these cases,...

The Growth of Public Sector Pension Funds

Pension provision in most countries is a combination of public (unfunded) schemes, publicly mandated contributory schemes, and voluntary private retirement savings. In some countries publicly mandated pension contributions are privately managed, but in others the government retains management of these funds either directly or through a specially created management agency. For the purposes of this paper we will treat both public unfunded schemes and publicly managed mandatory schemes as equivalent in both cases the government is responsible for the provision of retirement incomes from the scheme.1 The lines of distinction between the different schemes generally can be unclear even some privately managed mandatory schemes carry explicit or implicit government guarantees and or operate under government rules that are, in practical terms, tantamount to government management. Given the widely held belief that providing for the retired generation is, at least in part, a responsibility of...

Pensions Misselling

How much sales commission is reasonable This was a fundamental question during the pensions mis-selling scandal. Worse are the best and most suitable investment products being sold There has been a really damaging fall-out from the case in the UK of mis-selling pensions. About 1.1 million people were wrongly advised to transfer out of their company pension schemes. The compensation given to the victims is estimated at 12 billion so far, but this may only be a portion of the damage done. Many individuals and groups have been sold unsuitable pension products that should not have been promoted to them in the first place. There is a real need to protect the investor against the failures of a completely free market.16

Canada Pension Plan

An underlying principle of the Canada Pension Plan (CPP) is that good governance, by defining responsibilities and accountabilities, leads to positive outcomes. A key principle of the plan's governance is disclosure. This commitment is underpinned by the Canada Pension Plan Investment Board Act, which contains detailed provisions dealing with matters such as financial disclosure, auditing, public meetings, and availability of information.

Pension Funds

A pension plan is a fund that is established for the payment of retirement benefits. The entities that establish pension plans called plan sponsors are private business entities acting for their employees, state and local entities on behalf of their employees, unions on behalf of their members, and individuals for themselves. In the United States, corporate pension plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). Pension funds are exempt from taxation. There are two basic and widely used types of pension plans defined contribution plans and defined benefit plans. In a defined contribution plan, the plan sponsor is responsible only for making specified contributions into the plan on behalf of qualifying participants. The payments that will be made to qualifying participants upon retirement will depend on the growth of the plan assets that is, payment is determined by the investment performance of the assets in which the pension fund is invested....

Pension Crisis

You've seen all the headlines Pension plans are a growing crisis. San Diego has pension crisis. People are living longer lives. People are not saving enough for retirement. Many state local governments and large companies will experience shortfalls in their financial ability to meet retirement plan obligations. Millions of people will, at the very least, not get as much as they expect when they retire. In addition, the Pension Benefit Guaranty Corporation (see www.pbgc.gov) does not have enough funds to cover the shortfall of company pension plans. According to a survey cited by Forbes magazine, 313 (62 percent ) of the 500 companies listed in the S& P 500 do not have enough funds to cover their future expected financial obligations (as of early 2005). America is not alone Europe, Japan, and even China are in the same (or worse ) predicament. The message is clear People need to save and invest more to fill in the financial gaps that seem to be inevitable. Stocks are a...

The Canadian Experience on Governance

Public Pension Funds Accountability Present Pension Arrangements 125 National Pensions Reserve Fund Act, 2000 127 Annex 5.C Progress 141 Annex 5.D The National Pensions Reserve Fund Section 12 Guidelines 142 Annex 5.E National Pensions Reserve Act, 2000 Key Differences in Public Pension Fund Management Governance of Public Pension Funds Investment Policies, Processes and Problems in U.S. Public Sector Pension Plans Some Observations and Solutions from a Practitioner 211 Distinguishing Public Sector Pension Plans from Other Plans 212 Importance of U.S. Public Sector Pension Plans 213 Pension Funds The Cases of Singapore and India 259 Civil Service Pensions 274 Supervision of a Public Pension Fund The Retirement Benefit Act 282 Table 1.1 Implicit Public Pension Debt of Low- and Table 1.2 Regional Distribution of Public Pension Funds 5 Table 2.1 Agency Relationship Characteristics 53 Table 2.2 Allocation of Assets for 26 Pension Funds Table 8.1 Sources of Assets for U.S. Retirement...

The role of the shareholder corporate governance

Pension funds are closely involved in the discussion concerning corporate governance. They must be able to rely on stable and reliable corporate structures and in decision-making within companies which safeguards the interests of the investors. This allows pension funds to make large amounts of capital available to companies for a long period. For this reason ABP has an active corporate governance

Potential Agency Problems

In the same way that they can create problems for corporations, goal conflict and uncertainty can create agency problems for public pension funds. It is useful to consider two potentially separate problems traditional problems based on the direct self-interest of trustees, such as self-dealing and corruption, or simply shirking and problems based on the political goals of the trustees, such as the use of pension fund assets to further the social goals of the governing party. The latter occurs, for example, when the trustees, without considering the risk-return characteristics of the investment, direct the pension's assets toward investments that support local businesses and employment. In the United States, unresolved agency problems based on self-interest often involve politically motivated actions, commonly when politically appointed or ex officio trustees make decisions not to further the beneficiaries' interests but to improve their own situation. For example, during her campaign...

Government Restrictions and Social Mandates

That there is political involvement in the investment choices of public pension funds is well known. This involvement can come in the form of legislation passed on the initiative of trustees or can involve mandates to make certain investments or prohibitions on other investments. In the United States, the use of economically targeted investments (ETIs) was in the 1990s one of the most controversial issues facing public and private pension fund management. ETIs are investments in which the fund managers take into consideration not only the investment return but also the economic benefits to the local community (GAO 1995 Watson 1994). Examples of ETIs include California's investment of US 375 million in single-family homes to help increase affordable housing and create jobs, Connecticut's investment of US 25 million in a local company to save 1,000 jobs, and Pennsylvania's decision to provide favorable interest rates for home mortgages (Stevenson 1992). Another common ETI practice...

Separation of Ownership and Control

A fundamental problem with public pension funds is how to achieve a workable separation of ownership and control. For example, if the plan participants are taken to be the owners of the fund, problems may result where another group (of, for example, government officials) controls the pension fund. This section considers the implications of the separation of ownership and control on pension plan governance. It considers first the situation of private pension plans and then the more complex problem of public pension plans.

Implications for Governance

The challenge facing public pension fund managers is how to create the appropriate controls and incentives for trustees. To determine which governance mechanisms are appropriate, it is necessary to identify for which behaviors the trustees would be rewarded or punished. Recalling some of the agency relationship characteristics identified by Eisenhardt (1989), we see that there are problems with using outcome controls. Most indicators point toward the use of behavioral controls. A key governance characteristic is outcome uncertainty. Many factors beyond the control of trustees can affect the performance of a fund for example, limited local investments or short-term economic downturns can greatly affect performance. Likewise, there is a problem with the measurability of the outcome. Should the trustees be judged against a standard of short-term returns or consistent long-term performance It is as difficult to make an interim judgment of performance toward a long-term goal as it is to...

Nomination and Termination

An independent and vigilant board requires trustees that are not subject to political influence and that are free to exercise their independent judgment. These are the reasons behind the strong push toward corporate governance for boards dominated by outside directors. It is feasible for the participants of smaller civil service pension plans to directly elect some outside trustees, but for national schemes this may not be possible. Instead, the government may appoint trustees to represent stakeholder groups or to bring independent expertise to the board. The government's involvement in such appointments inevitably raises the concern that the trustees selected will be biased toward the government's policy goals and therefore will not be truly independent, however. Main et al. 1995). The corporate governance solution to this problem has been to establish a nominating committee comprised entirely of independent directors. While the CEO will still have some influence in selecting new...

Standards of Behavior

Corporate boards of directors are subject to fiduciary duties, and failure to comply with those duties can result in legal liability. In the United States, private pension plans are subject to the strict fiduciary requirements of the Employee Retirement Income Security Act (ERISA) statute. ERISA's exclusive benefit (duty of loyalty) and prudent person (duty of care) rules require trustees to make sound, well-planned investment choices for the sole benefit of plan participants. For example, some have argued that it would be a breach of fiduciary duty for a private plan trustee to take into consideration certain social or community benefits when making investment decisions, because as a consequence such a decision could not be for the exclusive benefit of plan participants. Even though U.S. public pension plan trustees are not subject to ERISA, some commentators have argued that the common law of trusts establishes a fiduciary duty that is not significantly different from the ERISA...

Information and Transparency

Information is an important and necessary part of behavioral controls. The trustees need information to perform their job with vigilance and the key stakeholder groups need information to hold the trustees accountable. As Eisenhardt (1989) stated, an agency perspective allows us to see that information is a commodity that can be purchased. Information should be provided up to the point where the marginal benefit of the information disclosure exceeds or equals the marginal cost of producing the information. As administrative costs can be significant in public pension plans, this is important. The information disclosed also should include explicit statements on the issues surrounding performance measures and accountability. To be useful, this information must of course be complete and accurate. In the United States, corporate securities laws dictate that management disclose all material information to shareholders and hold management liable for producing false information. In the...

Good Governance of the Governing Body

The governing body must itself practice good governance as appropriate to its legal status. Ideally, it should also be independent, particularly from the political pressure that both directly and indirectly is one of the biggest threats to any public pension fund. Clear statutory independence, while not an absolute guarantee, is probably the best guarantee that the governing body can have. Sound appointment and removal procedures for governors or directors of the governing body are important. These should be transparent and open so that they inspire public confidence.

Norwegian Government Petroleum Fund

A particularly useful feature of the annual report is a summary of key data (see Annex 3.A) another is a cost comparison with other funds. The latter involves submission of data to Canadian consulting firm Cost Effectiveness Measurement Inc. (CEM), which has a database containing the cost figures for capital management of more than 150 pension funds. From this database CEM selects a peer group of funds that have similar total assets to the Petroleum Fund. The costs of this group are used as a basis for assessing the costs of managing the Petroleum Fund.

Southeast Asia Region

Public fund management in Southeast Asia has had mixed results. This is for a variety of reasons, but typical problems are a lack of transparency and accountability. Defined contribution schemes, which are by definition funded, are widespread in the region. This is consistent with emerging international trends in financing retirement. It has been suggested that to obtain maximum economic benefits from these schemes the region needs to improve pension fund governance, including transparency and accountability, and that this may require the setting up of provident and pension funds authorities.3

The Canadian Experience on Governance Accountability and Investment

It is a pleasure to be back at this second global conference on public pension fund management and to share with you some information from a Canadian vantage point. It is through information exchanges of this nature that we can learn from each other how to better care financially for our aging populations. In many respects the world is facing a ticking demographic time bomb working populations are in decline in Europe and Japan and we will be called upon to support a swelling pensioner population. This demographic shift to a growing population of retirees has profound ramifications for global economic growth, the financial markets, political expression, and government fiscal stability. At the same time and in stark contrast, in many developing countries the young population is expanding rapidly, creating a different set of political and economic challenges. We share many common challenges, however. Specifically, how can we keep the most financially...

Recommendation for Fund

Ireland is fortunate in that for the first two decades of this century it is projected to have a relatively strong demographic position. While alerted to the problems of an ageing demographic, it thus has time to address them. The country also must address the serious issue of the rising cost of public service pensions the consequence of a boom in social provision in the 1970s which will begin to hit early in the century. Ireland also examined its total retirement provision position through a National Pensions Policy Initiative, the objective of which was to examine and debate the overall pension system and agree a pension reform package. Following from this background, three separate reports recommended the establishment of an explicit mechanism to fund, at least partially, the substantial growth that is expected to occur in First Pillar and public service pensions. These reports were the following the National Pensions Policy Initiative Report (1998) on overall pension reform, which...

Objective and Mission Statement

The fund started with a clear objective, set out in the National Pensions Reserve Fund Act as follows . to meet as much as possible, within prudent risk parameters to be agreed by the Commission, of the cost to the Exchequer of social welfare and public service pensions to be paid from the year 2025 until the year 2055 as provided for in the National Pensions Reserve Fund Act, 2000.

Decision on Investment Strategy and Portfolio Construction

Percent equities and 20 percent bonds. This reflects (a) the fact that drawdown of the fund cannot commence until 2025 and that drawdown must take place over a term of at least 30 years (b) the fund's strong cash flow (c) the nature of the promises made with regard to the pensions to be partly prefunded by the fund and (d) an assumed average equity risk premium of 3 percent per annum over the life of the fund. The commission further decided, as required under the legislation, that the benchmarks against which the fund's investment performance would be measured as seen in Table 5.1

Funds Main Objectives and Funding

Both countries have created reserve funds. The main purpose of Ireland's National Pension Reserve Fund, established by act in 2000 and made operational in 2001, is to meet part of the escalating cost of future pensions. In Poland the main purpose of the fund is to accumulate financial surplus in the system to support the pension part of the social security system through demographic change. of around 0.2 percent of GDP.1 Because of the huge cost of the pension reform, however, in 2002 and 2003 the equivalent of just 0.02 percent of GDP was accumulated. We are aiming to increase this sum by 0.01 percent of GDP every year. This raises the question of why we should be trying to save money in a reserve fund when we are at the same time transferring 1.5 percent of GDP into a social security scheme. There are a few reasons, I think, to do so. First, we are looking to the long term, with the goal of achieving at the minimum a pension component of the social security system that is fully...

New Zealand Superannuation Policy

New Zealand Superannuation (NZS) is a universal benefit paid to all individuals over the age of 65 who meet New Zealand residency criteria. The level of the pension ensures that a married person receives, after deduction of income tax, no less than 32.5 percent of the national average ordinary-time weekly earnings.2 It is indexed annually. There are neither means tests nor income history requirements. Indexation of the rate of NZS is based on inflation of the consumer price index, but is subject to the pension level not falling below the specified minimum relativity to average earnings. The pension level currently is above this minimum relativity, but the rise in real wage rates and earnings will within a few years mean that the minimum will be triggered and the pension will effectively become indexed to wage growth (see Figure 7.1). The New Zealand Government has provided public pensions for more than 100 years (Preston 2001). These pensions have taken several forms, including...

Circumstances of the Main Entities

The Government Superannuation Fund65 is a defined benefit pension scheme for public servants. It was closed to new members in 1992 but there remain about 25,000 employee contributors and 47,000 annuitants. It has an actuarially assessed past service liability of about NZ 12 billion that is reflected in the Crown financial statements. With assets in the region of only NZ 3 billion, it is partly funded, with the Crown guaranteeing any shortfall. This guarantee, combined with the defined benefit nature of the scheme, means that the Crown bears all of the investment risk of the fund. The government's policy is to meet a portion of the unfunded amount each year so that the shortfall is met progressively over the remaining life of the scheme.

Investment Policies Involve Two Big Risk Return Decisions

The balance of the volatility of fund returns is attributable to active management. From a statistical perspective, the active management policy thus appears to be of secondary importance, but setting the policy nonetheless is a key investment decision. Successful active management brings additional returns to a pension fund, making it easier to pay benefits unsuccessful active management subtracts returns and reduces the amount of assets available to pay those benefits.

Poor Governance Structures and Procedures Impede Successful Implementation of Investment Policies

It has been estimated that ineffective fund governance structures and procedures can reduce investment performance by about 50 basis points annually.5 While one-half of one percentage point of return may seem small, in the world of pensions it is a large number. With some US 2.2 trillion in state and local pension assets, the 50 basis points translate into some US 11 billion in foregone returns each year a large amount of money from a beneficiary's perspective. From an actuary's perspective, losing 50 basis points of return increases long-term pension costs by about 8 percent, and from an active money manager's perspective, 50 basis points is often the difference between keeping and losing an investment client. Descriptions of and prescriptions to resolve governance problems are widely available, for pension funds as for other organizations. Ambachtsheer and Ezra (1998) provide an excellent description of the shortcomings in pension fund governance structures and procedures, provide...

The Case of Singapore

Savings tier to finance its retirement needs. This mandatory savings pillar is administered by the Central Provident Fund (CPF). There are also a government pension fund and an armed forces provident fund, but details concerning these usually are not publicly available. A voluntary tax advantage retirement scheme, SRS, additionally was introduced in April 2001, but its impact has been small. Only about 300 million Singapore dollars (S ) have been put into the scheme, mostly by expatriates working in Singapore. This is in part because of the inherent design limitations of the scheme and in part because of the heavy penalties imposed on preretirement withdrawal. Note The information applies to employees with monthly wages above S 750. Workers included in the categories (1) Private Sector (2) Government Non-Pensionable employees (3) Non-Pensionable Employees in Statutory Bodies & Aided Schools (4) Singapore Permanent Resident (SPR) employees from their 3rd year onwards. Note The...

What Needs To Be Done

CPF board to support housing, healthcare, and other objectives. In the medium term (i.e., over two to four years), the accumulated balance of S 96 billion also should be transferred to the new asset management company. This company should publish its investment portfolio on a mark-to-market basis and should follow international best practices in provident and pension fund governance. Changing the mindset of Singapore's policymakers specifically their insistence on relying on a single tier to finance old age is another major problem. There is substantial analytical evidence that a single tier is inadequate, and that a multi-tier system incorporating a tax-financed redistributive first tier is essential. The parametric reforms in the 2003 and 2004 budgets furthermore have actually limited the role of the CPF in providing retirement income. Developments in the political economy will be crucial in determining the future of social security in Singapore.

Governance and Investment Policies and Issues

In 2002, the assets of the EPFO schemes amounted to about 6 percent of GDP. The small savings schemes, many of which act as retirement schemes, hold assets equivalent to about 10 percent of GDP, and occupational schemes and the schemes of public sector enterprises additionally hold assets worth an estimated 5 percent of GDP. These provident and pension assets in total are equivalent to about 20 percent of GDP. As India implements pension reforms this 20 percent will grow very quickly in a relatively short period of time. It is essential therefore that the administration and management of these schemes be rapidly improved. The five components of the social security system also must be Complicating this challenge is the fact that for most of these schemes the ultimate contingent (or conjectural) liability lies with the central government the Life Insurance Corporation of India, for example, is explicitly guaranteed by the government. At a time when fiscal consolidation and flexibility...

EPFO Investment Policies and Performance

One of the main differences between the investment guidelines issued by the EPFO and those issued by the Insurance Regulatory and Development Authority (IRDA) for the pension business of the life insurance companies is that the EPFO guidelines permit only the use of debt instruments pri-marily public sector debt instruments. Governance and Investment of Provident and Pension Funds Table 10.4a India Investment Guidelines of the EPFO The IRDA regulates insurance companies, both those that provide annuity products to individuals as well as those furnishing group annuities. The resulting funds are managed in accordance with the IRDA guidelines for pensions. These guidelines are much more consistent with modern portfolio investment management than the EPFO guidelines they stipulate only the maximum portfolio share that can be assigned to each asset class, giving Note EPF Employees' Provident Fund EPS Employees' Pension Scheme EDLI Employees' Deposit-Linked Indurance. India's financial and...

The National Social Security Fund

The National Social Security Fund, a contributory provident fund, is my main area of discussion. The fund is a workers' saving scheme created by the government to provide a basic retirement benefit. Participation is mandatory for all Kenyans working in private sector businesses with more than five employees. The fund has a registered membership base countrywide of 2.9 million, working for 59,025 registered employers. Contributions to the fund are made jointly by employees and employers. The current contribution per member is US 2.50 per month. Through these contributions the fund has accumulated a book value of US 600 million. The Retirement Benefits Act has been introduced in part to address these issues by requiring the adoption of international fund management practices. The key compliance requirements of the act include the timely preparation and wide publication of audited annual accounts the outsourc Progress toward compliance has been painstakingly slow. The political...

Lessons from the Kenyan Experience

Clearly, there are lessons to be learnt from the Kenyan experience. First of these is the need for stakeholder buy-in, and particularly that of politicians. Stakeholder backing is a catalyst for the successful regulation of a public pension fund. Through educational programs targeted at politicians, the public, and other stakeholders, regulators can build the foundation of popular support that is necessary to back up their regulatory efforts. Second, it is important to harmonize the laws and statutes that govern a public pension fund in particular, the fund and regulator should be put under a single ministerial portfolio as opposed to the Kenyan situation where the fund is in the labour ministry and the regulator at the finance ministry. Third, the historical performance of a fund cannot be disregarded simply because of intergen-erational agendas. Difficult and costly decisions about stated assets may have to be faced and made. Finally, it need to be recognized that if they are to...

Investment Policies

As funding of public pension schemes grows, governments increasingly are finding themselves in the role of fiduciary agent for their citizens. This role carries with it an implied responsibility for the public pension manager to select an investment strategy that balances risk and return appropriately for the citizens on whose behalf it is investing. with regard to the implementation of the investment policy must be clearly defined. Setting long-term targets and selecting a tolerance for risk involve strategic decisions that are fundamental to the viability of the scheme as a source of income replacement in retirement. The long-term strategy should identify whether the risk tolerance and performance targets are capable of producing outcomes that will meet the objectives of the scheme. This part of the investment policy should establish the broad shape of the portfolio and the risk parameters that will govern investment decisions. The strategic part of the policy also should establish...

Conclusion

This paper has attempted to draw together a set of principles that collectively define what we regard as best practice for establishing and operating a public pension scheme. The driving principles behind this framework are that the scheme should have clear objectives, that it should be free from conflicts of interest, that it should be operated in as transparent a manner as possible, and that the operators of the scheme should be accountable to its members for their decisions and for the extent to which they have met or failed to meet the objectives of the scheme. In short, public pension schemes should be operated in the best interests of those who bear the burden of their financial failings. In defining these principles as best practice we are fully aware that the pension schemes in many countries do not satisfy the principles we have outlined. In many cases, the deviations from best practice are deliberate and are designed to meet other objectives of government. While we recognize...

External Controls

These external controls are available neither for national public pension plans nor for civil service plans. In a centralized system, participants are unable either to shift their assets from one plan to another or to withdraw their assets from the plan. There is thus no equivalent of a product market. For civil service plans, the quality of those plans may have an effect on employee recruitment and retention, and failure to recruit employees may arguably be seen as equivalent to failure in the product market. However, in matters of finance, money is provided for a future payment and it is difficult for an outsider in the case of a public pension plan, the plan participants to determine if there is a problem with the use of those funds. This is in contrast to a consumer product purchase, where the consumer can typically and readily ascertain if there is a problem (Caprio and Levine 2002). This problem increases where there is inadequate disclosure, because in such cases the portfolio...

Board Composition

As discussed earlier, corporations have both inside directors and outside directors. Inside directors are also managers of the corporation in question, and can be either the source of moral hazard or lack the incentives to control moral hazard problems originating with the CEO. For public pensions, moral hazard problems (or goal conflicts with plan participants) typically are rooted with those trustees that also are government officials or that are appointed by government officials. A government may be able to bypass the board to use a fund's assets for other social or political goals (Iglesias and Palacios 2000), but it also may be able to achieve the same result if the board is dominated by trustees sympathetic or otherwise allied to it. Government-affiliated trustees are effectively the equivalent of corporate insider trustees. The composition of the board for a national pension plan is likely to differ from that of a board for a civil service plan. In the United States, for...

Accountability

The governing body should have a clear understanding of to whom they are accountable. In corporations, it is clearly understood that the board is accountable to the shareholders. For public pension funds, in contrast, there can be ambiguity on the issue of accountability. There are two possible groups of residual claimants, taxpayers and plan participants, and trustees may view themselves as being accountable to one or both of these stakeholder groups. They also may see themselves as being accountable to the political administration in power. In the United States, law mandates that private pension plans be managed solely in the best interests of the plan participants, and the trustees thus are accountable only to those participants. In some countries the same applies to public pension funds. For example, the Canada Pension Plan Investment Board Act directs the board to manage any amounts that are transferred to it in the best interests of the contributors and beneficiaries under that...

Performance Measures

Related to accountability is the issue of how a board measures its performance. For corporations, performance can easily be measured by share value or return on investment. For public pension funds, however, the board could base its performance on funding levels, the size of investment return, achieving a set investment return target, reducing administrative costs, or some other measure (or any combination of these measures). Similar to the issue of identifying an ownership group, failure to specify a performance goal can lead to a less vigilant board of trustees. Miller's study of nonprofit organizations is again instructive on this issue.

Roles of the Board

The board may have control over a wide variety of decisions with respect to the fund, including the setting of actuarial assumptions, investment of fund assets, setting of benefits, and other decisions that relate to the management of the fund. In this sense, the governing board of a pension fund is more involved in the running of the organization than is a corporate board of directors. Where a corporate board may assist in the general setting of strategy, it serves mostly to provide advice to management and to monitor management's behavior on behalf of shareholders. In public pension funds, the board typically takes on an active management role, including delegation to professional managers, in addition to monitoring the pension fund staff. In the United States, the board typically has authority over investment decisions. For example, a sample of state and local pension funds in 1998 showed 88 percent of funds to have investment authority. For the remaining 12 percent, investment...

Relevance

Research has been done to examine possible links between different aspects of public pension fund governance on public pension performance. Whilst there are some differences in the results these would seem to suggest that governance has a significant impact on public pension performance and that inconsistent performance is associated with indicators of poor governance.1 As accountability is an essential of good governance it would therefore appear to have a clear link with performance. An examination of the drivers of organizational performance furthermore found that in private pension funds organizational performance is strongly correlated with certain governance indicators, of which one is the presence of mechanisms to communicate with plan stakeholders.1

The Key Components

The governing body or person must comply with good governance requirements in the running of its own entity as well as in its running of the public pension fund. For instance, if the governing body is a corporate entity it must comply with the accounting and other requirements that apply to a corporate entity of its kind. The requirements for public transparency and reporting to all stakeholders should be at the heart of any public pension fund. A public pension fund is made up of the public's money it came directly or indirectly from the public and is intended to provide retirement income for them. The public need to know and understand what is happening to their money and what they can reasonably expect in the future. Public pension funds additionally can have a variety of other stakeholders and a high level of transparency and accountability also applies to these. Finally, it is desirable that there should be independent oversight of a public pension fund. As well as providing a...

Focus of Liability

It is easy to identify the focus of liability for a private pension fund, and this is almost always confirmed by the national legislation under which the fund operates. It is less easy to establish a clear focus of liability for a public pension fund, because of the large number and sometimes high diversity of stakeholders involved. The most important stakeholders should be the current and prospective beneficiaries, although the interests of each of these groups of beneficiaries can differ. The government is also an important stakeholder in any public pension fund, because provision of retirement income systems is always either a direct or indirect government concern. The relationship between the various stakeholders should be clear and in particular, the relationships between the governing body, the government, and the public. A further difference between public and private funds is that public pension funds do not usually come within the scope of national pension super

Good Models

Levels of transparency and accountability vary greatly amongst public pension funds. This is, of course, influenced by the culture within which they operate. Three public funds that stand out as good models for transparency and accountability are the Canada Pension Plan, the Norwegian Government Petroleum Fund and the California Public Employees' Retirement System (CalPERS). It is not perhaps a coincidence that these three funds are also considered to be successful and good examples of public pension fund performance. This section looks at some of the key features of these plans.

Conc Iusion

There is increasing global focus on transparency and accountability as a response to recent corporate and accounting problems. The issues which needed to be addressed for corporates also apply, and, in fact, could be said to be even more relevant to public pension funds. Public pension funds with high standards of transparency and accountability are useful as models. However, there is no ideal model as the transparency and accountability put in place needs to be country-specific it should be based on the capacity of that country to regulate on its standards of accounting on trust law, where this applies and on the general governance quality operating within the country. This applies to all global or cross-border standards because what is effective in one country may not work in another.

Background

First, some brief background information on Canada's public pension system. I apologize to those of you who first heard this two years ago, but it is important to your understanding of our reform thinking that you can place it in its proper context. Canada is a federal state. We have a central government, 10 provincial governments, and three territorial governments. The provinces have considerable powers and responsibilities. Some of these, including stewardship of the national public pension plan, they share with the federal government. Canada has existed as a sovereign state for nearly 136 years, and for 75 of those years we have provided financial relief for the elderly. In 1927 Canada introduced an old age security program as the first step toward reducing poverty among seniors. The next major milestone in the creation of Canada's income retirement system was the establishment in 1966 of the Canada Pension Plan, a mandatory plan for working Canadians to which all employees and...

Governance

Let me now turn to the factors that drive the Canadian Public Pension reform on the investment front, beginning with how the CPP Investment Board was set up to immunize it politically. As Robert Palacios stated in a recent paper for the World Bank1, In the past, most public pension funds have not been invested effectively largely because of political interference. The directors and management of the CPP Investment Board are confident that it will not. Legislation requires that the board of directors include a sufficient number of directors with proven financial ability or relevant work experience. In other words, it mandates that we have a knowledgeable board. The system governing appointments to the board, which is a departure from the traditional practice of government-owned corporations and of most public pension funds that are governed by nominees or representatives of governments, unions, and employers, further serves to ensure that this mandate is met. I do not want to leave the...

Integrity

Those who view the CPP Investment Board as an instrument of public policy, the primary responsibility of which is to help secure the financial future of the Canada Pension Plan, will be inclined to apply public sector expectations. Those who see the CPP Investment Board as an investment management company competing in capital markets will be inclined to apply private sector expectations. In most cases the standards and expectations are the same, but in some instances they are not. For example, in the public sector the use of blind trusts is a standard means of separating private investment interests and public duties. In the private sector this notion is alien. From the point of view of the CPP Investment Board, we frankly were concerned that we would have difficulty recruiting qualified employees and directors if they were obliged to put their personal investments in a blind trust.