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Understanding Pension Plans: Definition, Types, and Current Developments

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A comprehensive guide to pension plans, including recent legislative changes and industry updates.

pension definition

Pension plans have been a crucial aspect of retirement planning for decades. Defined as a type of retirement plan that provides a fixed or guaranteed income to employees during their retirement years, pension plans have evolved over time to meet the changing needs of the workforce. In this article, we will provide a comprehensive guide to pension plans, including their definition, types, and current developments.

Definition of Pension Plans A pension plan is a type of retirement plan that provides a fixed or guaranteed income to employees during their retirement years. Pension plans are typically sponsored by employers, who contribute funds to the plan on behalf of their employees. The funds are then invested, and the returns on those investments are used to pay out retirement benefits to plan participants.

Types of Pension Plans There are two main types of pension plans: defined benefit plans and defined contribution plans. Defined benefit plans provide a guaranteed retirement income to plan participants, regardless of how the plan's investments perform. Defined contribution plans, on the other hand, do not provide a guaranteed retirement income, and instead rely on the employee's contributions and investment returns to fund their retirement.

Recent Developments in Pension Plans Enacted last December as part of omnibus appropriations legislation, the Securing a Strong Retirement Act of 2022 SECURE 2.0 includes a number of provisions aimed at improving retirement security for Americans. These include increasing the age for required minimum distributions, expanding automatic enrollment in retirement plans, and increasing the limits on contributions to retirement plans.

In addition to legislative changes, there are also early signs of support for reviving pension plans in the private sector. State senators in Alaska have introduced a bipartisan bill that would create a new defined benefit pension system for state employees as a way to help recruit and retain workers.

Montana's unfunded pension liability has been a topic of debate for years at the state Legislature. Now, a pair of bills aimed at reducing the state's unfunded pension liability have been introduced, including one that would require the state to contribute more money to the pension fund.

Pension Plans vs. 401(k) Plans A pension plan guarantees retirement income, while a 401(k) plan depends on the employee's own contributions and investments. If you're lucky enough to have a pension plan, you don't have to worry about market volatility or making the right investment choices. With a 401(k) plan, however, you are responsible for managing your own retirement savings.

Industry Updates The end of 2022 and beginning of 2023 saw volatile markets that were difficult in most asset classes. Aon plc (NYSE: AON), a leading global professional services firm, announced today that the aggregate funded ratio for Canadian pension plans increased to 94.6% as of December 31, 2022, up from 93.4% at the end of September 2022. This increase was driven by strong investment returns, which helped to offset the impact of declining interest rates.

Changes to Tax Relief on Pension Savings This briefing discusses changes to the lifetime and annual allowances, which limit tax relief on pension savings. The lifetime allowance is the maximum amount of pension savings you can build up over your lifetime without incurring a tax charge, while the annual allowance is the maximum amount of pension contributions you can make each year while still receiving tax relief.

Overall, pension plans remain an important part of retirement planning for many Americans. With legislative changes and industry updates, it's important to stay informed about the latest developments in the world of pension plans.


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