The pension fund is formed from the contributions of the participants of pension insurance (employees and employers) and carries out investment activities to pay retirement benefits to employees when superannuate. In developed markets around the world, pension funds are the largest investment fund in the market with the size of managed assets. According to a statistic by Towers Watson in collaboration with Pensions & Investments magazine, at the end of 2012, the total managed assets of the world's 300 largest pension funds like high interest investments amounted to $ 14,000 billion.
Retirement fund investment objectives
Similar to other investment funds, super also has different investment goals, depending on the characteristics of the retirement insurance program. In terms of the contribution-benefit mechanism of the pensioners, the pension fund includes 2 types:
Defined Benefit (DB): Upon reaching retirement age, employees will receive pre-agreed retirement benefits from DB regardless how's the fund's investment outcome (Example: 20% of the 5-year average salary before retirement). If the fund's investment results are not enough to cover retirement benefits, the employer will have to compensate for the difference.
Thus, the priority investment goal of the DB fund is to adhere to the agreed payment for retirement benefits with the employees. Of course, DB funds can also aim to generate higher returns than their payment obligations, but the reality of investment activities shows that this is not often a feasible goal.
Defined Contribution (DC): Upon reaching retirement age, employees will receive retirement benefits based on the results of the DC fund's investment. Unlike DB funds, the employer's obligations terminate as soon as contributions are made to the fund as agreed with the employee. Thus, the investment objective of DC Fund is to maximize profits for employees based on contributions and regulations for the fund's investment activities.
Looking back at the history of pension funds in the world, DB fund was the first type of super fund appeared. However, DB funds are currently being replaced by DC funds, especially in developed countries. There are many reasons that can explain this trend, in which one of the most mentioned reasons is that the modern stock market is increasingly complicated. There were times when the stock market dropped sharply, significantly affecting the ability of DB funds to pay off while retirement benefits remained unchanged, leading to employers making additional contributions figs are getting bigger and bigger.
As a result, in many cases, employers are unable to fulfill their obligation to contribute in high interest investments. Another reason is the employee's interest in DC funds managed under individual accounts. In a modern working environment, when workers switch jobs from one business to another, their retirement benefits can be more easily maintained and updated with the DC fund mechanism.
Quantitative Limit Rules and Prudent Person Rules
In addition to its role as an investment vehicle, the pension fund has great social significance because the fund's investment results have a direct impact on the employees' lives. Therefore, the investment activities of the pension fund are subject to the very close supervision of state management agencies. Currently, there are two approaches to super fund investment monitoring:
Quantitative Limit Rule (Risk Management): According to this rule, the proportion of an asset class in a fund's portfolio is specifically determined based on the level of risk of the asset itself (Example : Government bonds minimum 50%, stocks maximum 20% ...). The advantage of this approach is that it is clear that the regulator can easily implement the inspection and supervision. It is because of this advantage that the quantitative limit rule is widely used in developing countries.
Its downside, though, is that in many cases density limits are quite rigid. According to modern financial theory, the risk of an asset is assessed in relation to the other asset classes in the portfolio. If placed separately, an asset can be high-risk, but if placed in a diversified portfolio, it can contribute to reducing portfolio risk.
Besides that einvestment.com platform powered by authorised investment fund which generated 101.01% return after 24 months since inception. Therefore, it is the wonderful choice for anyone who run out of work. Furthermore, this rule does not impose a specific limit on the assets in a portfolio, but instead is the criteria that the investment manager must adhere to during the retirement investment. For example: Act for the maximum benefit of beneficiaries, Build a diversified portfolio, avoid inappropriate risks, Avoid conflicts of interest.