KNOW THY PENSION

The other day i noticed quite a number of female aquitances i know are pregnant or have just given birth.It got me thinking about life and specifically old age and retirement.You may NOT believe this but as surely as you are breathing now one day you will be old and living on your pension,income or alms(depending on your state of affairs then).

About Pensions

There are two main pension scheme types:

-Defined Benefit: The employer shoulders any risk in the plan i.e. if at retirement the pension scheme assets havent made sufficient returns, the employer has to fork out the difference.
Forking out the diffefrence leads to a drop in profits.These are the legacy costs that companies like FORD and GM in the states suffer from.

The plus side of these schemes is that the benefits can be enormous(to the workers).Its also hard to value transfers in cases of shifting from one scheme to another.Government of Kenya has such a scheme But it is closed to new workers from July 2006.All new Government workers join a defined Contribution scheme.
Most private employers have shut down such schemes or converted them to defined contribution because of the risk it exposes the employer to.

-Defined Contribution

In this scheme both the employer and employee contribute.But the employer has no further liability other than his contribution.Most new schemes are of this kind and the older schemes are being converted to this.Its easy to value transfers between funds in case of job changes

Why should you care?

Defined benefit schemes with some inflation protection tend to be the best.If you live 20+ years after retirement you can find yourself in a situation where what you earnn as pension is higher than your salary before retirement.The sufferer is your former employer because he has to ensure you get the actuarially set monthly payments whether or NOt the scheme returns are sufficient.

Defined Contribution- You are paid what the scheme assets make.If you have a crappy manager tough luck.Thats why scheme beneficiaries and members have yearly meetings with their managers.You are suppossed to throw out the manager if he isn't performing.

This post covers employed people.I'll do one for the unemployed and self-employed.