An occupational pension is one that is tied to a person's job. There are two main types of occupational pensions, but their goal is the same: to build up a fund of money, grow the fund, and use it to pay for pensions for the employees who have a claim on the benefits.
The defined benefit pension is a form of pension fund that guarantees a certain level of benefits to employees who retire from the employer that operates the fund. These benefits represent be a percentage of the worker's final salary or a flat dollar amount. In the United States, pension funds that offer defined benefits are most common among government agencies.
A defined contributions pension plan has employees and employers making contributions to a general pension fund. At the time of retirement or a withdrawal at another time, the worker can draw down money from the fund according to how much he has contributed and how the fund's investments have performed. Many different types of pension funds fall under the category of defined contributions, including 401(k) plans, profit-sharing plans, employee stock ownership plans and individual retirement arrangements.
Regardless of the type, occupational pension funds must grow to ensure that they can afford their current and future obligations to workers. As a result, pension funds make significant investments in a variety of asset classes to ensure both growth and stability. Pension funds have specific goals to meet, in that the amount of current workers who will be able to claim benefits upon retirement and the number of retired workers currently claiming benefits are both known.
Usually, a financial services firm actually operates a pension fund. Pension funds have significance for several parties: the employer who offers them, the worker who contributes to them, the retiree who depends on them for income, the financial firm that operates them, and the market that accommodates their investments. Pension funds can be some of the largest institutional investors in the world, so their investment choices can affect individuals who are not otherwise related to the occupation or workplace offering the pension plan.
- Photodisc/Photodisc/Getty Images