Explain Pension funds in detail also discuss regulatory framework of pension funds under the Supervision of SECP.

Answer:

Pension Fund:

            A pension is a fund into which a sum of money is added during an employee's employment years, and from which payments are drawn to support the person's retirement from work in the form of periodic payments. A pension may be a "defined benefit plan" where a fixed sum is paid regularly to a person, or a "defined contribution plan" under which a fixed sum is invested and then becomes available at retirement age.

Different types of pension fund:

There are two basic types of pension fund as under:

1. Private Pension Funds:

“The private pension funds are those funds administered by a private corporation (e.g. insurance company, mutual fund.)”.

“Any pension plan set up by employers, groups, or individuals”.

2. Public Pension Funds:

“Public pension funds are those funds administered by a federal, state, or local government (e.g. social security)”.

“Any pension plan set up by a government body for the general public.”

Regulation of Pension Plans:

For many years, pension plans were relatively free of government regulation. Many companies provided pension benefits as rewards for long years of good service and used the benefits as an incentive. Frequently, pension benefits were paid out of current income. When the firm failed or was acquired by another firm, the benefits ended. During the Great Depression, widespread pension plan failures led to increased regulation and to the establishment of the Social Security system.

Employee Retirement Income Security Act:

SECP set certain standards that must be followed by all pension plans. Failure to follow the provisions of the act may cause a plan to lose its advantageous tax status. The motivation for the act was that many workers who had contributed to plans for years were losing their benefits when plans failed. The principal features of the act are the following:

·         SECP established guidelines for funding.

·         It provided that employees switching jobs might transfer their credits from one employer plan to the next.

·         Plans must have minimum vesting requirements. Vesting refers to how long an employee must work for the company to be eligible for pension benefits. The maximum permissible vesting period is seven years, though most plans allow for vesting in less time. Employee contributions are always immediately vested.

Pension Benefit Guarantee Corporation:

SECP also established the Pension Benefit Guarantee Corporation, a government agency that performs a role similar to that of the PFDIC. It insures pension benefits up to a limit if a company with an underfunded pension plan goes bankrupt or is unable to meet its pension obligations for other reasons.

When the market prices were high, most defined-benefit pension plans were adequately funded. Many firms with defined-benefit plans find it hard to compete against firms with much lower cost defined-contribution plans. This competitive disadvantage increases the possibility that the firms may not survive to pay down their deficits.

Individual Retirement Plans:

The Pension Reform Act of 1978 updated the Self-Employed Individuals Tax Retirement Act of 1962 to authorize individual retirement accounts (IRAs). IRAs permitted people (such as those who are self-employed) who are not covered by other pension plans to contribute into a tax-deferred savings account. Legislation in 1981 and 1982 expanded the eligibility of these accounts to make them available to almost everyone. IRAs proved extremely popular, to the extent that their use resulted in significant losses of tax revenues to the government.

Future of Pension Funds:

We can expect that pension funds will continue their growth and popularity as the population continues to grow and age. Workers in their early years of employment often find discussions of retirement investing creeping into their conversations. This heightened attention to providing for the future will result in an increased number of pension funds as well as a greater variety of pension fund options to choose among. We can also expect to see pension funds gain increased power over corporations as they control increasing amounts of stock.