The ABC of pensions (Part 2)

Pension funds are long-term savings schemes. Their objective is one, to collect contributions from contributors in the most effective way possible. Two, to invest them prudently in financial assets that combine profitability and security. And, at the end of the contributor's working life, to return accumulated or periodic savings to provide financial security in old age. 

Thus, pension funds are organizations with fiduciary responsibilities beyond the sound investment of money. They are frequently accountable to contributors and regulators. They must be managed with transparency and predetermined prudential standards. They must promote efficiency and cost reduction so as not to reduce the return to contributors. And, not least, they must ensure the integrity of the pensions received by their members. None of this is a small thing. 

Let us first start by taking a closer look at the quantitative determinants of a pension. As we said before, the pensions that contributors derive from their plans depend on how many years they contribute, the amounts they contribute and the investment returns during the life of the savings. These components affect to a greater or lesser degree the amount that is accumulated. But at the same time, they are all variables that have limitations in their application and impact on the final values.  

Referring to the amount to be contributed, the so-called quota, has a natural limitation in the competitiveness of salary and employment levels. Pension plans cannot receive contributions far beyond the financial feasibility of the contributors. High contributions reduce the income available to the contributor and much further, the capacity of the sources of employment. It is important to understand that the employer's contribution, although deducted from the employee, is a cost of the employer. A very high quota, which may look good on paper, can lead to a regression in employment rates and, on the other hand, in the ability of those companies or sectors to grow or consolidate. So, the opportunity to achieve a good pension just with the fee paid is relative to the overall welfare. 

A very powerful element in the growth of pensions is the number of contributions (or years) that a worker contributes in relation to his or her retirement age. This element is known as Density. The more contributions a worker has, the higher his contributions will be and the longer his money will be invested, accumulating value. Higher densities are usually associated with later retirements, since the worker has to remain in the system for a longer period of time.