These are known in some countries as superannuation funds.
A pension fund is any plan that is set up to provide retirement income to people. These are usually established by employers, unions, or governments as a means to provide payouts in later years.
The fund pools the contributions that come from the entities. This money is invested by professional managers who seek to generate a return. The goal is to grow the money which, along with the new contributions, exceeds the payouts to the retirees.
Pension funds are some of the largest investors out there. When it comes to pools of capital, few can rival the sheer size of these funds. They are often the largest institutional investors in both the stock and bond markets.
Open Vs. Closed Pension Funds
There are two types:
- Open - those which have at least one plan and are open to anyone
- Closed - plans which are only available to specific employees
Investments
Pension funds were restricted to investing in only government-backed securities. That was changed and now pension funds have a diversity of holdings. In addition to stocks and bonds, they will invest in student loan along with credit card debt. They will but different derivatives. We also see them gaining exposure to real estate through REITs.
Finally, we are seeing private equity investing becoming a popular choice for pension fund managers.