Insurance Companies and Pension Funds

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Insurance Companies and Pension Funds

• Part 2. Pension Funds

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Types--by sponsor or administrator

• Public pension plan--1.6 trillion
• Private pension plan--2.4 trillion
• Insured pension plan--878 billion

3
Types--by Defined Attribute

• Defined Benefit
• Funding
• Vesting
• Pension Liability
• Defined Contribution
• Funding
• Vesting
• Pension Liability

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Comparison of Types
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Comparison of Types
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Defined Benefit Plans

• Unit-benefit vs. Flat-benefit Formulas
• Administration by employer
• actuarial calculations
• payments into plan
• Fundedness
• excess contributions
• excess liabilities
• Administration by investor

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Regulation

• ERISA--5 major features
• DB have to buy PBGC insurance
• Full vesting within 7 years
• Max. 10 sponsors stock or bonds
• Fiduciary duty
• PBGC--19 per employee under-funded
  charge

100
7years
6years
5years
4years
3years
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Regulation, cont

• Fundedness Issues
• Funding by employers
• no legal requirement to fully fund
• employee incentive problem
• tax deductibility

Percent Underfunded
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Defined Contribution Plans

• Administration
  employee
• tax-deductible contributions
• choice of investment type employer
• limited employer obligations
• Portability
• Variations 401(k), 403(b), ESOP, IRA, Keogh Plan

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Regulation

• IRS regulations about taxation
• employer contributions
• employee contributions
• IRS regulations about withdrawals by pensioner

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Performance

• Stock investments outperform SP 500 less than
  40 of the time
• Bond investments outperform Salomon bond index
  more than 66 of the time

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• To investigate the pension status of a company
  where youd consider going to work
• Go to companys web site, locate the annual
  report, financial section, notes to financial
  section
• http//www.bloomberg.com/pwealth/cdsearch.html