Pension fund assets

The particular assets held as investment by pension funds depend heavily upon whether the fund is government controlled or private. Private funds emphasize investments in corporate stock, which represented about three fifths of their assets at year-end 1979. Corporate bonds ranked a distant second, accounting for almost one fourth of all financial investments. With few liquidity needs, private pensions held relatively small amounts of cash, time deposits, or government securities.
Corporate stock is far less important in the portfolios of government pension funds. State and local government pension programs held almost $44 billion in corporate stock at year-end 1979, which represented about one quarter of their financial assets. However, stock investments were far outweighed by corporate bonds, which amounted to $86 billion-close to half the assets of public pensions.
Under the pressure of strict regulations and more-frequent benefit claims, public plans hold a larger proportion of cash and liquid government securities than do private plans. For example, investments in U.S. Treasury and federal agency securities, demand deposits, and currency represented a full 20 percent of total financial investments at year-end 1979. Government pensions also place moderate amounts of funds in state and local government securities-often IOUs issued by their own governmental unit.

Factors Affecting the Growth of Pension Funds

Most experts feel that pension fund growth is likely to slow significantly in future years. One reason is the rising proportion of pension beneficiaries to working contributors, related to the gradual aging of the general population. At the same, the cost of maintaining pension programs has increased dramatically. The full funding of a plan to cover all promised benefits places extreme pressure on corporate profits, while the recent mediocre performance of the stock and bond markets has diminished investment returns.
Even more significant is the rapidly rising cost of government regulation. The employee Retirement Income Security Act (ERISA), Passed by Congress in 1974, imposed costly reporting requirements on the industry and granted employees the right to join a pension program, in most cases, after only one year on the job. More-rapid vesting of benefits was also required so that employees can recover a higher proportion of their past contributions should they decide to retire early or move on to another job. Trying to eliminate the danger that pension may not have adequate funds to pay future claims against them, congress now requires employers to eventually cover any past liabilities not fully covered at present. in addition, a federal agency- the Pension Benefit Guaranty Corporation (PBGC)-was created in 1974 to insure some part of all vested employee benefits. PBGC is supported by premiums contributed annually by participating employers and can borrow up to $100 million from the U.S. Treasury in am emergency.
These new government regulations have forced many private pension plans to close. The controls of other as been turned over to a financial institution- typically a bank trust department or life insurance company- better able to deal with the current rules. Without question, the pension sector faces troubled times and considerable uncertainty in the period ahead

Investment strategies of pension funds

Pension funds are long-term investors with little need for liquidity. their incoming cash receipts are known with great accuracy since a fixed percentage of each employee‘s salary is usually contributed to the fund. At the same time, cash outflows are relatively easy to forecast because benefit payments are stipulated in the contract between the fund and its members. This situation encourages pensions to purchase common stock, long-term bonds, and real estate and hold these assets on a more-or-less-permanent basis. In addition, interest income and capital gains from investments are exempt from federal income taxes, while pension plan members are not taxed on their contributions unless cash benefits are paid out.
While favorable taxation and predictable cash flows favor longer-term somewhat riskier investments, the pension fund industry is closely regulated in all of its activities, including the investing of funds. The employee retirement Income Security Act of (ERISA) requires all private plans to be funded, which means that any assets held plus anticipated investment income must be adequate to cover all promised benefits. ERISA also requires that investments must be made in a "prudent" manner, which is usually interpreted to mean highly diversified holdings of high-grade common stock, corporate bonds, and government securities with only limited real estate investments.
While existing regulations do emphasize caution and conservatism in pension fund investments, the private plans have been under intense pressure in recent years by both management of the sponsoring company and employees to be more liberal in their investment policies. The sponsoring employer has a strong incentive to encourage its affiliated pension plan to reduce operating expenses and earn the highest possible returns on its investments. This permits the company to minimize its contributions to the plan. Both sponsoring employers and employees have a keen interest in seeing that the pension plan earns a high enough return on its investment to at least keep pace with inflation. Otherwise, the employees will tend to seek other jobs whose pension programs offer more lucrative returns.

Pension funds and real estate

Pension funds have long been recognized as a major potential source of real estate equity capital. Moreover, real estate markets are often characterized by a lack of information necessary for performing the quantitative investment analysis that pension funds or their advisors generally undertake. The value of real estate owned by pension funds is estimated to be $149 billion. . Pension funds must decide whether to make their real estate investment directly or to pursue their investment strategy by investing REITs or commingled real estate funds.

Pension funds

private and government (including federal,state,and local)pension funds provide retirement income to employees covered by the pension plan.Funds are collected by regular contributions from employees,usually via payroll deduction. Since the funds flowing in are not demand deposits,you cannot write a check against your balance in a pension funds.Like life insurance companies,these institutions can accurately predict payouts and hence can hold long-term assets. They hold portfolios consisting mostly of stocks and bonds. The returns on these assets are paid out to participating individuals wen they reach retirement age.