Please visit our privacy statement page for more information about cookies and how we use them. Edit your profile Clear profile. As people develop through their lifetime they have an expectation that a time will come when they will be able to retire. For some people the State pension is sufficient to provide a basic level of income. Others may have an opportunity to accumulate wealth without using pension schemes - perhaps through their business ventures or other assets.
But most people will want to supplement what they have with some form of pension scheme. Many employers also take the view that, while their employees are working, they should be building up an entitlement to a pension when they retire.
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Looking for Aviva Pensions? Visit our Aviva Pensions page to see full details of the products we offer. Visit Aviva Pensions. News articles Take a look at our library of helpful articles and news. Understand your options in 6 steps Read more. Warnings Important information to consider. For some years now, traditional pension plans, also known as pension funds, have been gradually disappearing from the private sector. Today, public sector employees, such as government workers, are the largest group with active and growing pension funds.
This article explains how the remaining traditional pension plans work. The most common type of traditional pension is a defined-benefit plan. After employees retire, they receive monthly benefits from the plan, based on a percentage of their average salary over their last few years of employment.
The formula also takes into account how many years they worked for that company. Employers, and sometimes employees, contribute to fund those benefits. Private pension plans offered by corporations or other employers seldom have a cost-of-living escalator to adjust for inflation, so the benefits they pay can decline in spending power over the years.
Public employee pension plans tend to be more generous than private ones. In addition, public pension plans usually have a cost-of-living escalator. There are two basic types of private pension plans: single-employer plans and multiemployer plans. The latter typically cover unionized workers who may work for several employers. The PBGC acts as a pension insurance fund: Employers pay the PBGC an annual premium for each participant, and the PBGC guarantees that employees will receive retirement and other benefits if the employer goes out of business or decides to terminate its pension plan.
The PBGC won't necessarily pay the full amount retirees would have received if their plans had continued to operate. Instead, it pays up to certain maximums, which can change from year to year. ERISA does not cover public pension funds, which instead follow the rules established by state governments and sometimes state constitutions.
Nor does the PBGC insure public plans. In most states, taxpayers are responsible for picking up the bill if a public employee plan is unable to meet its obligations. That means they must put their clients' the future retirees interests ahead of their own. By law, the investments they make are supposed to be both prudent and diversified in a manner that is intended to prevent significant losses.
The traditional investing strategy for a pension fund is to split its assets among bonds, stocks, and commercial real estate. Many pension funds have given up active stock portfolio management and now only invest in index funds. An emerging trend is to put some money into alternative investments, in search of higher returns and greater diversity. Those investments include private equity , hedge funds , commodities , derivatives , and high-yield bonds.
While some pension funds are in solid shape today, many others are not. For private pension plans, those numbers are reflected in the financial obligations taken on by their insurer, the PBGC. The Congressional Research Service reported that, "PBGC projects the financial position of the single-employer program is likely to continue to improve, but the financial position of the multiemployer program is expected to worsen considerably over the next 10 years.
However, that assessment was written before the passage of the American Rescue Plan Act of in March It includes provisions intended to help the PBGC strengthen multiemployer plans. Plans that face serious financial trouble are eligible to apply for special assistance in the form of a single, lump-sum payment calculated to cover the plan's obligations through the year Rather than insurance premiums, the money to fund this program is to come from the U.
Treasury's general tax revenues.
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