Financial Management Individual Work 1 Week 12 - Essay Example

FINANCIAL MANAGEMENT INDIVIDUAL WORK WEEK 12 al Affiliation) Introduction Pension plans have becomecrucial in the employment industry to the government, the employers, the employees, and the overall society. The United States pension system has acted as employee motivator and has also provided a form of social insurance (Kotlikoff, 1983). The most basic and widely used pension plans are the defined contribution plan and the defined benefit plans. Features of Pension PlansThe main aim of all pension plans is to provide a fixed level of consumption at the time of retirement.

Different pension plans differ in their structure, however, they some common characteristics. One of the commonest features is that they at transferring production to individuals who are no longer involved in the process of production. This is a link between the present group of workers with the past workers who have reached the retirement age. Other features include the need for employees to be eligible in order to be part of a pensionable plan and varied statutory limitations that are related to the contribution and the benefit under the plan (Hustead, 2001).

Another feature is that participants under the plan accrue contribution and upon attainment of the normal retirement age, they receive the vested portion of the benefits. Pension Fund ManagementPension fund management involves investment of assets in order to achieve the long term goal of providing funding for retirement (Cohen, 2007). Because of the huge amount of importance that pension funds hold over the long term financial well being of the recipients, managing the fund has become very crucial in organizations.

However, individuals who oversee pension funds face challenges that keep on evolving with changes in the business environment, for example, challenges driven by factors like national legislation. Another concern relates to good governance because funds need to be well run by skilled employees at the management level and there needs to be effective supervisory board. Lack of skilled employees increases the risk of mismanagement of funds which is depended on by the beneficiaries. Inflation has remained one of the major concerns when managing pension schemes.

This is because pension schemes are usually exposed to a rise in inflation as most of the pension funds paid are inflation-linked. Managers need to find ways of dealing with inflation, for example, by hedging through investing in swaps and index-linked bonds. If these options are preferred, another challenge comes up where a question comes up as to whether a company wants to deal with inflation expensively because index-linked bonds and swaps are considered expensive. With uncertainty in the economic environment, pension managers have been forces to always think of risks in terms of central scenarios, that is, what is likely to happen and what is less likely to happen.

This is how recession needs to be treated, not as the most likely scenario, but as a risk that must be considered. There is always that fear of the effects of a recession if it occurs. This is because even an unknowable risk like a disaster like an earthquake can plunge the world’s economy back to difficulties. BibliographyCohen, B., & FitzGerald, B. (2007). The pension puzzle: Your complete guide to government benefits, RRSPs, and employer plans. Mississauga, Ont: J. Wiley & Sons Canada. The pension puzzle: Your complete guide to government benefits, RRSPs, and employer plans.

Mississauga, Ont: J. Wiley & Sons Canada.Hustead, E. C., & Mitchell, O. S. (2001). Pensions in the public sector. Philadelphia: Univ. of Pennsylvania Press.Kotlikoff, L. J., & Smith, D. E. (1983). Pensions in the American Economy. Chicago: University of Chicago Press.