A pension provides regular income payments that you would receive for the rest of your life when you stop working--typically when people retire. A pension plan is a large pool of savings grows over time through contributions from workers or plan participants and their employer or plan sponsor. The plan assets are managed by professional investment managers, and most of the risks (such as investment risk) associated with managing plan assets will be assumed by the plan sponsor rather than plan participants. Particulars will vary from plan-to-plan. For example, there are variables such as how the money or contributions are set aside, who makes contributions, how the income is generated, when payments are made, the types of payments that are made, and how long pension payments last. The basic idea is that the longer you work the higher the payout. There may be tax breaks for pension contributions and there are limits on how much can go into a plan. Many pensions are payable to a surviving spouse on the death of the policyholder, and some pension payments are inflation-adjusted. The term pension is most often associated with defined benefit pension plans that provide regular, annuity-like payments to retirees. This is in contrast to defined contribution plans such as the 401k that shift most responsibilities onto employees and do not provide guaranteed lifetime income.

Robert Merton's Retirement Income Lecture

MIT Professor Robert Merton addresses the challenge of financing retirement income in a lecture delivered this past January.

Merton briefly discusses the financial crisis and suggests that it is unproductive to think about digressing to a financial world that preceded Glass-Steagall and financial innovation.  Merton’s view is that financial engineering is indispensable in addressing the large and complex issues of pension and retirement finance.

Merton’s basic prescription for improving the general state of retirement finance includes increasing savings, working longer, taking more risk.  Most would agree with the first two choices but the third—taking more risk—seems...


China's Annuity Market Developing Slowly

Despite the demographic challenges associated with an ageing society, individual annuities are non-existent in China. Some individuals in China do have access to what is referred to as an enterprise annuity . Enterprise annuities are a form of supplemental pension plan that is supported by the Chinese government. Enterprise annuities were enabled through legislation that went into effect in May of 2004. In order to offer enterprise annuities to employees, Chinese employers are required to...
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First Longevity Swap for Active Pension Plan Members Enabled by JP Morgan

JP Morgan recently assumed 70 million pounds of longevity risk through a longevity swap that covers the lives of active members of a UK-based defined benefit pension plan . This is the first longevity swap that covers active pension plan participants. Previous deals have focused on retired pension plan members. The longevity swap is based on JP Morgan's LifeMetrics longevity index and it has a 10 year term. The index-based swap is reportedly a better vehicle for dealing with active pension plan...

RMS Model Provides a New Perspective on Longevity Risk

Risk Management Solutions (RMS) is well known as a leader in the area of catastrophe modeling and analytics.  The company provides its services to a broad range of insurers, reinsurers, consultants and capital markets participants who are active in the property and casualty insurance industry.

More recently, the company has developed resources that focus on life and health risks.  Though initially focused on...

Variable Annuity Sales in U.S. Could Reach $500 Billion per Year by 2018

A 2008 sigma study from Swiss Re suggests that U.S. variable annuity sales could reach $400 - $500 billion per year by 2018. These are gross sales projections that include exchanges of existing products. Annuity exchanges are typically a significant portion of overall or gross sales. This 2008 projection was based on compound annual growth projections of 7-9 percent. Also mentioned was the fact that variable annuity assets in Japan grew at an astounding rate between 2003 and 2008--increasing at...