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What is a Pension Fund?

A pension fund is a kind of mutual fund. A mutual fund, you say? That’s a kind of fund which groups together assets with the intention of growing them steadily and surely so that the individuals and companies who pay into them will receive returns on their investment.

A pension fund specifically aims to provide the people who invest in them with a steady income pot when they retire; a retirement fund. It’s a common way of ensuring that you’ll be financially secure when you’re ready to stop working.

How do pension funds work?

There are different kinds of pensions available. For example, there are workplace pensions, in which both an employer and their employees pay in instalments into a scheme, and the employee will receive payments on their retirement.

The amount an employee receives on their retirement is sometimes calculated according to how many years the employee has worked for the company, their salary and how long they’ve been part of the scheme (a ‘defined benefit scheme’).

Retired people in the UK are usually also eligible for a State pension: the contributions you make to National Insurance over your working years form a contribution to this pension.

There are also more and more personal pension options available with pension companies, where there’s the option to pay into a scheme that’s separate from a workplace scheme and the State pension in order to further secure your future financially.

Money trees…

In the majority of these cases, a scheme member simply has to keep paying into their scheme, and their money has to be left to grow for a stated amount of time before they will be allowed to withdraw money if they so wish. Market value reduction (MVR) is a penalty cost imposed if a policy holder attempts to withdraw money from the scheme before the end of their policy.

 When it comes to the decision-making and management of the funds to make them grow, that comes down to the pension fund managers and the fund trustees. Pension fund managers manage the assets within a particular scheme, i.e. they advise on investments and often also make the investments on behalf of the scheme members.

Pension schemes often have a trustee; somebody who is appointed to be responsible for the assets in a fund. A trustee may be an accountant or solicitor for example. A trustee will liaise regularly with the pension scheme manager and/or fund managers and listen to their updates on the fund’s progress and any advice they may have. Depending on how the scheme works, they may have to give the go-ahead before a fund manager makes an investment for the scheme.

Then there are the pension scheme managers – the guys who manage the pension schemes. They calculate and track the fund performance and report that information back to scheme members and/or trustees; develop new pensions policies, research pension industry developments and provide updates to clients; and often mediate discussion between an employer (a representative such as a benefits manager) and trustee whenever necessary. They usually oversee the administration team too (the worker ants who make sure all payments into and from schemes are actioned accurately and on time).

Risk management is also incredibly important within a pension fund. Pension providers will employ specialist pensions actuaries to work out risk levels on things such as the potential financial impact of a scheme on a company’s accounts, make calculations to determine the amounts that will need to be paid by the scheme now and in the future, and provide advisory services on issues like benefits packages.  

There are also legal specialists on hand within a pensions provider; solicitors are necessary in order to draft policies, provide insight into the latest legislation regarding pensions and advise accordingly in the development and amendment of schemes.