Funding and Unfunding of Pension Funds
How active the equity market is would usually depend on the activity of the institutions and, especially, pension funds. The precise effect may depend on the asset allocation policy of the pension fund as between equities and bonds.
This brings us to the fundamental question about how pensions are funded. The first point is whether pensions are largely provided by private funds or state. The second is whether there is a fund or whether the pensions are paid out of current taxation and contributions.
Where money is contributed by private individuals is invested in funds to provide pensions, the biggest markets are the US, UK, Netherlands, Japan, and Switzerland.
In Germany, the employees' pension contributions are handled by the company and held in a book reserve in the accounts of the company. The amounts are available for the general purposes of the company and the payments are made from corporate funds. It's interesting that events, which caused horror in the UK-Robert Maxwell having access to the pension funds-are the routine in Germany. There are some invested funds, but the total is relatively modest.
In Sweden, pension provision is largely by the state, but the money is invested in the system can be regarded as funded. In France, on the other hand, while the state also handles most pension payments through the state bank, they are not funded but paid for out of current taxation. Private pension provision is largely confined to schemes for senior executives.
This 'unfunding' is likely to change due to demographic factors. Right across Europe and Japan, populations are aging. With six or seven employees funding each pensioner may have been satisfactory. The future is likely to see two or three workers for every pensioner. This is what occurs when there are too many at the bottom and not enough at the top of the age pyramid.
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