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Chapter 18 - Pension funds. This chapter provided an overview of the pension fund industry. Pension funds provide a way of accumulating retirement funds similar to life insurance contracts and mutual funds. Pension funds, however, have a tax advantage in that an employee's contributions to pension funds are exempt from current taxation. | 8- McGraw-Hill/Irwin Chapter Eighteen Pension Funds 18- McGraw-Hill/Irwin Pension Funds Pension funds (PFs) offer savings plans through which participants accumulate tax deferred savings during their working years before withdrawing them in their retirement years funds invested are exempt from current taxation (i.e., during working years) tax payments are not made until funds are withdrawn by the participant (i.e., during retirement) PFs were first established in the U.S. in 1759 to benefit the widows and children of church ministers The first corporate PF was established by American Express Co. in 1875 18- McGraw-Hill/Irwin Pension Funds By 1940 approximately 400 PFs existed most were for employees in the railroad, banking, and public utilities industries By 2007 over 700,000 PFs existed 28.3% of U.S. households’ financial assets were in PFs compares to just over 5% in 1950 There are two distinct PF sectors private PFs are funds administered by private corporations (e.g., insurance companies or mutual funds) public PFs are funds administered by federal, state, or local governments (e.g., Social Security) 18- McGraw-Hill/Irwin Pension Funds A pension plan governs the operation of a pension fund Pension funds are broadly classified into two categories, defined benefit plans and defined contribution plans A defined benefit PF if a fund in which the employer agrees to provide the employee with a specific cash benefit upon retirement a flat benefit formula PF pays a flat amount for every year of employment a career average formula PF pays benefits based on the employee’s average salary over the entire period of employment a final pay formula PF pays benefits based on a percentage of the average salary during a specified number of years at the end of the employee’s career times the number of years of service 18- McGraw-Hill/Irwin Pension Funds Defined benefit PFs (cont.) a fully funded PF has sufficient funds available to meet all . | 8- McGraw-Hill/Irwin Chapter Eighteen Pension Funds 18- McGraw-Hill/Irwin Pension Funds Pension funds (PFs) offer savings plans through which participants accumulate tax deferred savings during their working years before withdrawing them in their retirement years funds invested are exempt from current taxation (i.e., during working years) tax payments are not made until funds are withdrawn by the participant (i.e., during retirement) PFs were first established in the U.S. in 1759 to benefit the widows and children of church ministers The first corporate PF was established by American Express Co. in 1875 18- McGraw-Hill/Irwin Pension Funds By 1940 approximately 400 PFs existed most were for employees in the railroad, banking, and public utilities industries By 2007 over 700,000 PFs existed 28.3% of U.S. households’ financial assets were in PFs compares to just over 5% in 1950 There are two distinct PF sectors private PFs are funds administered by private .
