A Pension Fund is basically designed towards retired people. A Pension Fund creates an opportunity to pay people income after retirement. The pension fund is a collection of funds used to provide pensions for employees, once they reach the end of their working years and start their retired life. This fund is established by an employer who manages the retirement funds which are contributed by the employer and employees. It is seen that large corporations operate their pension funds in-house. Large amount of capital is controlled by this so-called Pension Fund and it represents the biggest institutional investors in a lot of countries. The pension funds needs to be maintained well so that in the long run, it is put to use for the retired employees of the company.
The very basic idea of having a pension plans is to provide post-retirement income to employees. The pension obligations meet by the company are fulfilled by calculating in advance, how much money must be set aside to cover the future cost of pensions. I the past there were companies who use to make promises to pay pensions without setting aside any funds to support this cause. Now, the arrangement has become more formal with the governments intervention. It is now required that companies put aside the necessary funds to ensure that pensions are paid to the respective retired employees. Once it was made compulsory for the companies to set aside funds towards pension, it then brought attraction towards investing these funds in order to earn high return and thus in the bargain, it would lower the cost of providing pensions.
Pension plans are also called as “patient capital” because of their long term feature. The companies would previously put their pension funds in government bonds or life insurance companies. But due to inflation and rising salary issues and low fixed income returns, pension plans became very expensive. Hence, Pension Funds was diverted into equities in order to obtain a higher return and lower the eventual cost of their pension plans. As time passed by, the direct real estate investment plan concept was used for investing the Pension fund. The type of investments made by a pension fund depends upon its objectives and constraints. If the investment of the pension fund is made with the main aim of achieving highest practical return, then this act will lower the cost of their providing pension to the retired employees.
If the financial condition of pension plan is in a difficult financial situation then the company’s pension fund has to make up for the deficit by putting all of company’s pension fund in very high return and risky assets. But this step is not advisable. So if a pension fund does not have sufficient investment plan to cover its pension obligations, in that case such a situation can be called as “under funded”. In this case of shortfall, the company will have to make it up through higher contributors. On the other hand, if a company has more investments for covering its pension obligation, is then often referred as over funded.
During a retirement life, you have certain basic lifestyle which you would love to maintain it. Now, you must be aware that inflation increases in wage level and productivity will go up in the years ahead of your working life. Investing your savings in fixed income will not be able to take care of the above mentioned three issues. In such a case, equity investment can be your option. There is a risk involved in equity investment. But a total loss can happen only if you invest in just one share. You can manage well if you diversify your investment. You must have diversified shares. The investor should be given a choice to invest their pension funds.