《金融市场与机构 Jeff Madura》ch27.pptVIP

27 Pension Fund Operations Chapter Objectives Describe the different types of private pension funds and the terminology of pension funds Describe the pension management styles Explain how pension funds can become underfunded and overfunded Describe the role of the Pension Benefit Guaranty Corporation in enhancing the safety of pension plans Pension Fund Terminology Summary Pension Fund Developments Pension plans are a recent development Depression and union bargaining after World War II From “pay as you go” to funded pensions From defined benefit to defined contribution pensions Pension funds have become a major capital market participant Background on Pension Funds Public pension funds Social security State and local governments Many public pensions are funded on a pay-as-you-go system Pension fund is unfunded Current contributions support previous employees Depends on current cash flows of entity to support pensioners Many public pension plans are fully funded Types of Private Pension Plans Defined-benefit plan Annual contributions are determined by the benefits “defined” in the plan paid at retirement If value of pension assets exceeds (over funded) current and future benefits owed, employer may Reduce future contributions Distribute surplus to shareholders Occurred during stock and bond boom of the 1990’s Types of Private Pension Plans Defined-contribution plan Provides benefits determined by the accumulated contributions and the fund’s investment performance “Contributions” are designated in plan, not amounts available at retirement Firm knows with certainty the amount of the contribution Provides uncertain benefits to participants Types of Private Pension Plans Future pension obligations of a defined-benefit plan are uncertain because obligations are fixed payments to retirees and payments depend on salary level, retirement ages and life expectancies Over-optimistic projections (estimated rates of return) can mean inadequate cash to cover obligations High r