History of Pension Funds

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History of Pension Funds

In tradition, welfare of the elderly was the role of the family unit. However, during the twentieth Century the population began to grow in the UK and USA and the “elderly became a serious problem that only the apparatus of the state was able to help”  Problems raised when the state was no longer able to provide support to the elderly due the elderly becoming older, improvements with medicine, improvements in general standards of living and so on, which led to the role of financial institutions. I.e. the creation of pension funds which has now become one of the largest financial institutions in the USA and UK.

Information about Pension Funds

Pension plans an “agreement by a sponsor to provide income to participants upon their retirement.” This is where it uses pension funds as the financial intermediary to manage the assets and pays the benefits of a pension plan. Pension funds are typically sponsored by employers whereby Meir Kohn had looked at an important question: “Why do workers and firms find it beneficial to enter into this sort of arrangements?” they have suggested that the employers acts as financial intermediaries because a firm using a pension plan can use it as an incentive device as “the pension acts as a performance bond posted by the worker.” Therefore, it gives the employees the motivation to work hard and to not quit the job and move on to the next so easily. As moving to a new job would result in losing what they have already saved up. An advantage for the firm is that it gives the “firm a reputation for taking care of its employees” and so the firm would “find it easier to recruit good workers and to motivate them.” I am going to look at in particular International Business Machines Corporation (IBM) pension fund. IBM has mentioned that they had done an analysis of “over 75 companies on all aspects of their compensation and benefit plans and program” and their results have shown that they were offering significantly more to their employees than most other companies, “In pensions, IBM found that 75% of its competitors do not offer a pension plan and even fewer offer retire medical”  

        IDM is a private pension fund. i.e. an occupational pension fund. There are two types of pension plans which are defined benefit plan and defined contribution plan. Under a defined benefit plan, the plan sponsor promises to make annual payments to qualifying employees beginning at retirement which uses a formula to do this. It considers the length of service of the employee and the employee’s earnings. In a defined contribution plan, the sponsor makes specified contributions into the plan on behalf of qualifying participants. “On retirement, the amount accumulated in the account is paid out to the participants either in cash or as an annuity.” Recently, however, a hybrid type of plan called a cash balance plan had been developed. In this plan, plan benefits are also fixed based in a formula and investment responsibility is borne by the employer which are similar to a defined contribution plan in that assets accumulated in an “account” for each employer. In 1999 IBM’s pension fund had announced in using new cash balance pension and retired medical insurance plan. These plans effectively revoked long-promised plans for many employees IBM says “average employee would lose 20% of retirement pay under the cash balance plan.” They have chosen to use this plan because they felt that “a cash balance pension plan better reflects the reality of today’s marketplace, both in terms of employee career expectations and the competitiveness of our total compensation programs.  

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Information about IBM

IBM’s main function is to provide customer solutions with the help of advanced information technology. IBM operates in more than 150 countries worldwide. They strive to leas in the invention, development and manufacture of the industry’s most advanced information technologies.

Pension funds acting as Financial Intermediaries.

In order to see how Pension funds, and in particular how IBM works as a financial intermediary, we need to know what a financial intermediaries are. Fabozzi et al  defines it as “playing the basic role of transforming financial assets that are less desirable for a large part of ...

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