In this section we will present a short review of the most important types of pension plans, which may be, for the purpose of our classification, part of any of the three legs of the retirement security stool.

We will use various criteria for the classification. The first criterion is the asset base for the liabilities for benefits promised to plan participants. Here we can point out two types of plans:

  • pension plans without a fund ( pay-as-you-go plans) and
  • pension plans with a fund ( funded pension plans).

A pay-as-you-go plan does not accumulate specific assets designated to create income needed to pay benefits. Instead, they depend on future income generated by the plan sponsor to pay future benefits. In effect, such plans are backed by the credit of the plan sponsor, as opposed to funded plans, where benefits are backed by the portfolio of capital assets. Employer-sponsored pay-as-you-go cannot be qualified for tax purposes in the United States: this is a provision of ERISA. The reasoning behind pay-as-you-go private plans prohibition in ERISA is quite sound. In a pay-as-you-go plan, participants depend on their employer for the security of their benefits.

This dramatically increases the risk to plan participants. Such increased risk is present even for participants who are still working. Without legal protection, in the case of a bankruptcy, plan participants’ claims would become a part of all creditors’ claims and may not be safe. It is even possible, that participants’ claims would not even be recognized as employer’s liability.

Even if recognized, if, in the course of bankruptcy proceedings, other liabilities were determined to have priority over pension obligations, employees would not have any recourse and any retirement protection.

Funded pension plans avoid the potential pitfalls of pay-as-you-go plans. The fund accumulated for the purpose of providing benefits allows for a substantial Retirement plans as a part of economic security system increase in the security of participants’ benefits. In the United States, qualified pension plans are funded. However, pay-as-you-go plans are still a dominant form of pension plans among social insurance plans, such as OASDI in the United States.

Social insurance is administered and guaranteed by the state, or, in the case of the United States, by the federal government. This makes the credit problems described above practically nonexistent. Insolvency of social insurance would be basically equivalent to insolvency of the state itself. Such an insolvency is not only extremely unlikely, it is also an uninsurable event: one cannot find a realistic protection against it.

The second criterion for classification of pension plans is the method of correction of an imbalance between assets and liabilities. From that perspective, we distinguish between:

  • defined benefit plans and
  • defined contribution plans.

There are various possible means of support in the old age. Traditionally, the elderly had depended on support from their family members, mostly their children.

Churches and charitable organizations had assumed a larger role over time. But major social transformations of the twentieth century had given those two forms of support a secondary role.

The simplest solution to the problem of old age is the one used once by the aristocracy: a person can retire as soon as this person has acquired enough wealth to retire on. In short, the wealthy ones can retire. Interestingly enough, this may not be as difficult as it appears, due to the increased longevity we all enjoy. A person earning 4000 a month, saving 10% of income over the span of 40 years, and earning 7% real on the income saved, will accumulate slightly over 1 million monetary units by the end of the period.

 With a rough approximation of a life annuity factor of 20, this provides enough income to replace one’s wages for the rest of the lifetime. This calculation ignores the effects of inflation, but in a free-market economy both wages and capital market instruments generally grow at rates not only matching inflation but also exceeding it. For example, in the United States, long-term average rate of return of stocks in the twentieth century was roughly 7% above inflation.

At the end of the nineteenth century, new state-run retirement schemes were created, beginning with the German social insurance system created by Chancellor Bismarck. New private retirement also started around the same time. American Express created a company pension plan in 1875, and Baltimore and Ohio Railroad Company started one in 1880. In the United States, private pension plans grew rapidly during and following World War II, when wage increases were limited due to wartime wage and price controls, but collective bargaining for pension benefits was allowed.

In 1974, another watershed event for pension plan history in the US occurred—the federal law named Employee Retirement Income Security Act (ERISA) was passed. This law created a requirement for qualified pension plans (i.e., those receiving tax assistance in the form of tax exemption for contributions and tax deferral for investment income) of having a fund appropriate for paying the benefits and making a regular payment of the plan normal cost, as established by a qualified actuary.

Most developed economies in the world have gradually evolved towards a system of what is commonly called a The three legs in this concept refer to: state-sponsored, employer-sponsored, and individual retirement benefits. The first leg is commonly created with a system of social insurance, such as the United States Social Security System (Old Age, Survivors and Disability Insurance or OASDI), or with a privatized mandatory system of individual accounts, the first of which was created in Chile in 1981.

In the United States, the second leg is represented by employer-sponsored pension plans of either the defined benefit or the defined contributions variety. The third leg in the US consists of the variety of personal retirement accounts, such as Individual Retirement Accounts (IRA), Roth IRA accounts, and others. In what follows, we will also refer to the three “legs” of the stool as the tiers of the pension system.

Retirement plans constitute one of the key elements of every society’s financial security system. Of course they are of utmost importance for the elderly, but they have great effect on the functioning of the national economy and everyone’s welfare. Let us note that one could divide human life into three main phases: youth, productive years, and retirement.

There are many perspectives on this division, but in this work we are interested in the economic one. Youth is therefore the period when a person, through education, acquires ability to earn income throughout one’s productive life. Acquisition of education, i.e., investment in human capital, is among the most important financial issues in a person’s life.

Another such issue is, of course, the accumulation of financial capital for retirement, the subject of this work. Human capital acquired mostly during one’s youth is gradually used up during one’s productive life. One may argue that a person should re-acquire education later in life, as the human capital accumulated early in life does become obsolete eventually, as the technology of production changes. Ironically, the blessing of longer life enjoyed by most of the world’s population in the twentieth century has made such a threat of a need for reacquisition of human capital more likely.

Nevertheless, eventually one’s physical and mental ability to work is depleted, and somewhere before or at that moment, one needs to replace human capital with financial assets allowing for comparable standard of living.

The problem of financial security in the late stages of life has assumed increasing significance as human lifespan expanded. In the prehistoric times, the antiquity, or the Middle Ages, retirement protection was never a social issue, as few people reached the retirement age (defined as the age when productive ability is no longer available).

On the other hand, in the twentieth century, providing for retirement became a very important social issue. As that century drew to a close, it also has become a major challenge globally. For example, the life expectancy for a person aged 65, calculated

 

human capital, i.e., the on life tables Wales and by 29.86% in France. This seems to be a permanent universal tendency; in the United States the life expectancy for an analogous person increased between 1960 and 1999 by 23.40%.

The World Bank publication goes as far as to call it the Age Crisis economies appear to be unprepared for increasing longevity of their populations, the resulting ageing of their societies, and increased retirement needs.

•Dissapointed with your existing pension plan?
•Need to merge your current pension plans?
•Unsure about your pension plan and need advice?

We can help you get the most out of your pension with our FREE pension transfer advice! Get some advice NOW!
If you are considering a pension transfer, then you need advice from a professional, its not something you can easily do yourself, as the UK pension transfer law is very complex, and constantly changing.

For most people, after they take their house out of the situation, their pension is the biggest asset they have, and they need to take care of it as an investment for the future, so moving your pension from a plan which currently isn’t working for you into a better pension plan is always a good idea.

The only problem with getting pension transfer advice is … it can often be very costly as you need to seek advice from a IFA registered practisioner.

When should I consider a pension transfer?

The most important thing to remember is that it is your pension and your future, so you should never seek a pension because you heard that someone else has done it, or someone else is getting a better deal with another company.

Remember, everyone’s future plans and current situation is very different, that is why it’s of upmost importance to seek the correct advice before even considering when to transfer pensions.

The main reasons someone would want to do a pension transfer are:

•Your existing pension plan is ending.

•You find a plan with lower fees than what you are currently paying.

•You want to merge a personal and occupational pension plan.

But … it is of upmost importantance to speak to a finacial advisor before making any decisions about a pension transfer. Choosing a pension transfer advisor that suits your needs and you trust is the first step you need to take.

What should I look for in a pension transfer?

When you decide on a pension transfer, and find a financial advisor who you trust and can guide you, you will need to ask them for a pension transfer value analysis.

This information is very important to you, as it will show you whether or not it is going to be worth you changing pensions, and how much you will earn on a new plan. It will also contain information on how well your new personal pension plan will need to perform to make up for any shortfalls from the pension transfer.

Always make sure to check the current performance of the pension plan that you are on. If it is currently performing well it may NOT be a good idea for you to seek a pension transfer at this time.

What should I avoid when considering a pension transfer?

It is generally considered not to be a good idea to swich from a company pension plan to a private pension plan. The reasoning behind this is your current employer will be willing to make contributions into your company pension plan, but would not make any contribution to a private pension scheme if you decided to change over.

The only time you would need to make such a pension transfer would be if you changed employer, but then it would be better to transfer to a plan with your new employer than a private plan.

If you are currently working as a teacher, nurse or work for the local council, you are probably on a public sector pension scheme.

These types of schemes cannot be match by private pension schemes, as they are guaranteed against inflation, so it would be impossible for a private scheme to compete with this.

How do I get more information on a pension transfer?

It’s simple! Just complete the form above and we will personally call you, and give you further information. Our advice is FREE, and you are under no obligation to change your pension at any time.

We can find the best pension transfer scheme FOR YOU!