Employee Pension Plans

624 WordsFeb 22, 20182 Pages
An employee wants to have an amount of money for consumption after retirement that is certain. An employee can achieve this on his own by saving or investing during his career life and for this to be achieved the employee requires discipline and knowledge about investing. However, individuals are not generally equipped to make decisions for their future retirement, nor do they want to make these decisions (Aaron, 1999). To solve these problems an employee can acquire a pension policy at a pension fund. A pension fund hires employees with the knowledge about investing and imposes the discipline of saving an adequate amount of money each year. Also, a pension fund can make use of economies of scale by pooling many employees, which lowers many costs for example administration costs. Kakes and Broeders(2006) talk about the different characteristics that a pension plan has that is the level of the benefit, the certainty of the benefit, the level of the contribution and the volatility of the contribution. Between these characteristics there exists a trade off. The more certainty given to the benefit, the higher the contribution will be, also the higher the benefit the higher the contribution needs to be. These characteristics can be present in different proportions in different pension plans. The main question that a pension fund faces is : which combination of characteristics do participants prefer ? In the recent financial crises of 2008, Goudswaard, Beetsma, Nijman, and
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