Question

Describe the difference between a defined benefit pension fund and a defined contribution pension fund. Describe the difference between an insured pension and a noninsured pension fund What type of financial institutions would administer of these?

Answer 1

Pension - For the benefit of the employee and to support them after retirement, a specified amount is being contributed by the employer during his employment tenure. The employee get this amount post retirement.

Defined Benefit Pension Fund - A Predefined Fixed sum which is payable on the retirement of the employee. The amount is fixed considering the earnings, tenure of employment. The amount receivable by the employee after retirement is known in advance. This plan is used as a tool to retain employees.The Fund is controlled by the Employer and the details of the fund is not shared with the employee. The vesting period is longer in this case. The retirement benefit is paid only if retired employee is alive,i.e, his heirs has no right on these funds.

Defined Contribution Pension Fund - The employer and the employee contribute specified amount to the fund and these funds are then invested to earn earnings. Here the contribution fund is known but the benefit payout is uncertain as it depends upon the investment risk and rewards assumed by the individual.Here, the funds are being controlled by the employee. Vesting period is shorter. The Fund is paid to the employee as well as his heirs.

Insured Pension Fund - In this funds Contributions are collected,handled,invested and administered by the Insurance Company. Contribution is invested in Insurance Sector and becomes the property of Insurance Company. The risk lies with the Insurance Company.

Non-Insured Pension Fund - In this funds Contributions are not collected,handled,invested and administered by the Insurance Company. These Fund provides a higher rate of return and are more risky. This fund is administered by Financial Institutions other than Insurance Company through Trust or any Sponsoring Corporations.The Fund becomes the property of Sponsoring Corporation.