How Do Pension Funds Provide Public and Private Sector Employees Financial Stability Even after Retirement?

Key takeaways:

• Introduction
• Role of pension funds in providing financial stability to the workforce
• The rise of the industry in Asia-Pacific and North America

In many developed and developing countries, a major chunk of the government budget goes to paying salaries, pensions, and interest payments. Traditionally, only government employees were entitled to a pension after retiring from their jobs. However, in the past few years, with the growing emphasis on welfarism, many countries have launched schemes and programs to provide pensions to workers and employees in the informal sector also. A pension fund is a pool of money that is created to provide a regular income to people after they retire from their job. These funds have, thus, become an important medium to help people maintain their standard of living in their post-retirement period.

Understanding the role of pension funds in ensuring regular income to retiring employees

As said earlier, pension funds are no longer offered only to government employees, but also to private sector employees and informal workers through various welfare schemes. Due to this development, banks and financial institutions across the globe have launched various types of pension funds that cater to the different sections of the population. The most common type of retirement fund is deferred annuity plan which allows an individual to set up a pension fund either through a single upfront payment or via periodic installments over a stipulated term. After retirement, around 30-35% of the funds can be withdrawn tax-free, while the other 65-70% is taxed as per the rules and regulations imposed by the government.

Apart from this, many private businesses have launched pension plans with life cover to support their employees in case of any mishaps. These plans come with an insurance coverage option, which allows the employee’s nominee to withdraw the accumulated funds in case of death. Moreover, some amounts of these funds are also allocated as risk coverage to the employee and his/her nominee. Thus, this fund provides financial stability to the employee along with his/her family too. In recent times, pension plans under mutual funds have also been introduced by many financial intermediaries which invest the contributed money into various shares, bonds, debentures, etc.

The primary aim behind any government or business offering pension funds to its employees is to provide a guaranteed income to the individual, thus ensuring his/her financial independence even after retirement. Moreover, these plans offer liquidity to the individual, as the account holder can withdraw the sum at any time after the accumulation stage. Thus, even though the fund is designed for post-retirement spending, this feature allows the individual to meet any unforeseen expenses. Also, policyholders have a choice to make one-time payments or make contributions through periodic installments. This flexibility helps individuals from different economic backgrounds to avail themselves of the benefits of such pension schemes.

Favorable investment policies in North America and Asia-Pacific expanded the scope of the industry

The pension funds industry has witnessed immense growth across the globe, especially in the North America region for several reasons. Firstly, countries such as the US, Canada, and Mexico have experienced huge economic growth in the past few decades, particularly in the post-globalization era. As a result, the disposable incomes of people in these nations have increased substantially, thereby promoting a culture of savings among the population. At the same time, technological advancements and an increasing shift toward digital banking solutions have contributed to the expansion of this industry in North America.

On the other hand, the Asia-Pacific region is expected to have the fastest growth rate in the pension funds landscape. The rapid pace of urbanization and industrialization in this province's developing countries has increased the middle class's standard of living. This has ultimately improved the demand for such retirement-saving programs. Programs like the National Pension Scheme of India have extensive coverage and offer benefits even to retail traders, self-employed persons, shopkeepers, commission agents, brokers, etc. In case of the death of the subscriber, the spouse of the beneficiary is entitled to receive 50% of the pension. As per many economists, the pension scheme has played an important role in improving the quality of the vulnerable and marginalized sections of Indian society.

To summarize, the growth of the pension funds industry is attributed to the launch of retirement-savings schemes by various governments and private companies across the globe. The flexibility and liquidity features offered by these plans have increased their popularity among different sections of the population. The growing disposable incomes and the rapid pace of urbanization in developing countries are expected to augment the growth rate of the landscape in the coming period.

To understand the different growth drivers and investment opportunities in the landscape, feel free to contact us.

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