Since Retirement is something I like to write about on my blog. So when I realized that after the pandemic in nearly every country, people started asking for a pension. Where they have Market linked pensions, they want full government-funded pension plans.
You can read my post about Mutual funds for Retirement, When should you retire? You can click on it and read those. But While reading them I realise that I didn’t directly write about pensions. I don’t know the reason. But now it seems a good time. Why?
In India, the Himachal Pradesh state election was the first when the Pension issue came into the limelight. The previous government made expenditures for better education and other services, salaried employees are a large part of the Himachal Pradesh population. In the United States, Former governor and current senator of Florida Rick Scott said that Social security, medicare, and Medicaid should be ON CHOPPING BLOK every 5 years are not going well with his voters. State of the Union speech of Joe Biden made it clear that Democrats are not interested to slash Social Security, Medicare, and Medicaid, even if he gets booed, seems that comments are haunting the Republican party.
In Europe, where the Cost of living crisis is big, it is a major issue In France, Hundreds of thousands of people are protesting against Pension reforms. 2022, after the pandemic, Germany is increasing their pensions which were largely stable or slightly decreasing. A large block of baby boomers retiring at the same time in the United States is changing the calculation of Social security funds. Lower interest rates were damaging pension funds. Canada’s teacher’s pension fund named Ontario teachers pension fund invests in Toronto Eaton center, many toll roads in the United States, the Sydney desalination plant, a Total of 5 airport assets including Brussels airport, etc assets but some people don’t want their money invested in market-linked or index funds. What is all this? What is all this? What is the history of pensions?
The Bismarck Pension system in Prussia, introduced in 1889, was one of the first modern pension systems in the world. Named after the Chancellor of Prussia, Otto von Bismarck, the system was created as a way to provide for the elderly and to reduce poverty among the elderly population. To qualify for the pension, workers had to have reached a certain age and have made contributions to the system for a minimum number of years. The amount of the pension was based on the worker’s salary and years of service, and it was designed to provide a basic level of income for retirees. The pension system was mandatory for workers, with contributions being taken directly from their salaries. This helped to ensure that the system was well-funded, and it allowed the government to provide pensions to a large number of people. The Bismarck Pension system was a major success, and it quickly became a model for other countries around the world. Many countries, including the United States, adopted similar pension systems in the decades that followed. The system was also credited with reducing poverty among the elderly and improving the standard of living for retirees.
The Social Security Act, signed into law by President Franklin D. Roosevelt in 1935, established the Social Security program in the United States. The program was designed to provide a basic level of income to American workers and their families in the event of retirement, disability, or death. Before the Social Security Act, there was no comprehensive system in place in the United States to provide for the elderly or those in need. The Great Depression of the 1930s left many Americans without work or without enough money to support themselves, and President Roosevelt saw the need for a program that would provide a safety net for the country’s citizens. The Social Security Act established a system of payroll taxes, with both workers and employers contributing to the program. The taxes collected were then used to pay benefits to eligible recipients. The program was initially limited to providing retirement benefits, but it was later expanded to include disability and survivor benefits as well. Just like the Bismark pension plan, the Social security program was mandatory for workers, with contributions being taken directly from their paychecks. This helped to ensure that the program was well-funded, and it allowed the government to provide benefits to a large number of people. The Social Security program was also designed to be self-sufficient, with the contributions from workers being used to pay the benefits of retirees.
A pension plan is an employee benefit that commits the employer to make regular contributions to a pool of money that is set aside to fund payments made to eligible employees after they retire. There are two main types of pension plans: the defined benefit and the defined contribution plan. A defined benefit plan guarantees a set monthly payment for life (or a lump sum payment on retiring). This payout is typically based on factors such as the employee’s salary, years of service, and age at retirement. In a defined benefit plan, the employer is responsible for making sure that the plan has enough assets to pay the promised benefits, and the employee is not responsible for making contributions to the plan. If you are lucky, then you will get a defined benefit plan or as we know them in India old pension plan. In this case, you don’t need to do anything. The government will do everything for you.
A defined contribution plan creates an investment account that grows throughout the employee’s working years. The employer commits to making a specific contribution for each worker who is covered by the plan. The balance is available to the employee upon retirement. Here You need to care about many things. in India, we know them as NPS or the national pension system. In the united states, they are 401(k), IRA, etc. in a defined contribution plan, This may be matched by contributions made by the employees. The final benefit received by the employee depends on the plan’s investment performance.
Social security and bismarck pension plans were both, Defined benefit plans.
So how to manage pension plans?
Think of an investment portfolio as a basket that holds all of the investments you have in your various retirement and non-retirement (taxable) accounts. Ideally, your portfolio grows with you and provides the income you need to live out your post-work years in comfort.
There is a way for you that is to Do it yourself. But there are some risks attached and if you are not professional it is very much possible that you will end up saving and investing lower and maybe in the wrong assets. Another disadvantage when you manage your pension investment is that it requires a significant amount of time and effort to set up and manage. Individuals must take responsibility for making contributions, selecting investments, and monitoring the performance of their retirement savings. So anyone should let professionals handle it. because, in many cases, Debt securities are part of all investments as someone who is having more than 8 years of career in the finance field, I can tell you that this is difficult to check all bits and parts.
There are many pension funds available market and I believe they are a better choice. the reason is their investment profile. Here I want to talk about the investment profile of Pension funds. Pension funds typically have a long-term investment horizon, as they need to provide a reliable source of income to retirees over many years. As a result, pension funds typically have a more conservative investment strategy compared to other types of investment portfolios. In simple terms, Their holding period is the longest among other Investment entities. Insurance funds also hold long but they may hold different liquidity needs.
Pension funds typically invest in a mix of assets, including stocks, bonds, real estate, commodities, and alternative investments. The specific mix of investments that a pension fund holds will depend on several factors, including its investment objectives, the length of its investment horizon, and the level of risk that the fund is willing to take on. For example, pension funds with a longer investment horizon may be more willing to invest in riskier assets, such as stocks, as they have more time to recover from any short-term losses. On the other hand, pension funds with a shorter investment horizon may have a more conservative investment strategy, investing primarily in low-risk assets, such as bonds.
In terms of bonds, pension funds may invest in a mix of government bonds, corporate bonds, and bonds issued by municipalities and other public entities. The type and duration of bonds held will depend on the specific investment objectives and risk tolerance of the fund. In terms of stocks, pension funds may invest in a mix of large-cap, mid-cap, and small-cap stocks, as well as international stocks. The mix of stocks held will depend on the fund’s investment objectives and risk tolerance, as well as its view of market conditions and economic trends. Real estate can also be an important part of a pension fund’s investment portfolio. This can include investments in commercial real estate, residential real estate, and real estate investment trusts (REITs).
I want to touch on one point which I believe is right in this post and that is investment from pension funds in infrastructure. I believe that Investment in infrastructure is an important component of many pension funds’ investment portfolios.
Infrastructure investments typically include investments in transportation infrastructure, such as airports, ports, and highways, as well as investments in energy infrastructure, such as power plants, transmission lines, and pipelines. Other types of infrastructure investments may include investments in water and wastewater systems, telecommunications networks, and social infrastructure, such as hospitals and schools.
One of the main benefits of infrastructure investment for pension funds is the stable and predictable cash flow that it can provide. This is because infrastructure assets, such as toll roads and bridges, typically generate revenue through user fees or tolls, which provides a stable and predictable source of income for investors.
Another benefit of infrastructure investment is its relatively low level of risk compared to other types of investments. This is because infrastructure assets are typically considered to be essential services that are critical to the functioning of society, and therefore have a lower risk of obsolescence or disruption.
In addition to these benefits, infrastructure investment can also offer the potential for long-term growth. This is because infrastructure assets can appreciate over time, as the demand for their services grows. In addition, many infrastructure assets have the potential to generate income through inflation-linked revenue streams, which can help to protect pension funds from the effects of inflation over the long term.
As I am writing this in India, I am bound to write about the old pensions. Many states are going towards the old pension system. States like Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh have already rolled out the Old Pension Scheme. Under the Old Pension Scheme, approximately 50 percent of the last drawn salary was provided as a pension. This is more like a defined benefit plan, where The Government is bearing all the risk.
Indian financial system is not that developed for bearing such large pressure. So it is better to let the government handle it. If you want to invest on your own, Invest early because time is money at least in pension investment. Take big risks in early investment. Start converting them into debt securities. Don’t be shy about investing in infrastructure investment securities if you find the right way. Real estate investors are another asset class.
