Chapter: 4 Institutional Investors

Section: 5 Pension Funds

These are funds created by large corporations and comprise of contributions deducted from the employee's current salaries to pay for their post retirement benefits. There are two basic types of pension plans: Defined Contribution and Defined Benefit.


i) Defined Contribution Plans: These are in effect saving accounts established by the company for its employees. The employer contributes funds to the plan, but the employee bears all the risk of the fund's investment performance. The employee is responsible for directing the management of the assets, usually by selecting among several investment funds in which the assets can be placed. Investment earnings in these retirement plans are not taxed until the funds are withdrawn, usually after retirement.


ii) Defined Benefit Plan: In defined benefit plans, the employer has an obligation to provide a specified annual retirement benefit. That benefit is defined by a formula that typically takes into years of service and the level of salary wages.