Pension Plans: What You Need to Know.

You probably already know a little bit about pension plans - either you have one or someone you know does - but the financial underpinnings behind a pension are familiar to few. Pension offerings have become scarce in the private sector, and it's important to understand why. In this article, we'll explore why employees love pension plans, and why companies try their hardest to avoid them.

What is a Pension?
A pension is a company-sponsored fund that is supposed to provide a company's employees with a livable income for their retirement years. Generally speaking, there are two types of pensions - defined-contribution plans and defined-benefit plans.

• Defined-contribution plans are the simpler of the two (and the more common today). In a defined contribution plan, the amount of money contributed to the plan by the company is set from the get go (often as a percentage of what the employee contributes). The money is then invested over the span of the employee's career, and the eventual balance in the account is paid out upon retirement. With this type of plan, the value of the employee's pension is based on the performance of the investments, so the eventual benefit to the employee is uncertain.
• Defined-benefit plans, on the other hand, specify the ultimate payouts to retirees, regardless of the returns on the pension fund's investments. In a defined-benefit plan, the company is on the hook for whatever the fund can't generate. This is one of the principal reasons that defined-benefit plans are becoming a thing of the past - much to the chagrin of those entering the workforce. While some organizations are keeping their defined-benefit plans (such as major league sports organizations), many companies are freezing defined-benefit pension funds, restricting their participation to those employees who are already enrolled. 

The Employee Perspective

Nowadays, you might wonder just how relevant pensions are for an employee. There is a growing number of people who retired with pensions, but then saw their plans collapse as their pensions' sponsor companies hit hard times. If you are able to join your company's pension program, the pension not only provides the asset growth of a self-directed retirement account, it also compounds its power with contributions from your employer. Recent legislation means that pensions are better protected today than in the past as seen in the Pension Reform Act in Nigeria. The legislation was in response to major pension collapses that occurred in the '90s. However, having a pension isn't an excuse to avoid saving money for retirement - far from it. Even those lucky few with pensions should hold retirement accounts outside of their companies' plans. 

The Company Perspective

When companies sponsor a pension plan for their employees, they're essentially making an unofficial statement about how important their employees are to their bottom lines. Many CEOs justify limiting pensions by citing "responsibilities to shareholders", but providing adequate retirement planning is often in a company's best interests.

For example, companies get tax advantages from pension plans, although the tax advantages only kick in if a certain percentage of employees enroll in the plan. This helps ensure that the plan is a valid retirement choice, and not just an empty offering.