How Do We Understand Pension Funds?

Introduction

How do we understand pension funds? Investopedia defines pension fund as a fund established by an employer to facilitate and organize the investment of employees' retirement funds contributed by the employer and employees. The pension fund is a common asset pool meant to generate stable growth over the long term, and provide pensions for employees when they reach the end of their working years and commence (Investopedia, 2011). Pension funds all over the world were successful in generating aforementioned stable growth but then the crisis struck.

The purpose of this paper is to look deeper in the financing of the pensions funds, the status after the financial crisis of 2008, and to compare pension funds of Iceland with pension funds abroad, to look deeper into similarities and differences.

Pension funds abroad

There is a big difference how pension funds work abroad. There are some possibilities, for example, the pension provision might be mandatory or voluntary, it might be linked to employment or personal contribution.

Pensions funds have grown enormously in importance as owners of financial assets. There are different financial functions that pension funds use in order to stimulate change in the financial landscape. Some non-functional aspects and an increased demand for certain functions on behalf of end-users also help explain the development of pension funds as intermediaries (Antolin, 2008). Pension funds invest a lot in the stock market, this means that they are important owners of the listed companies.

The role of pension funds is clearly not to facilitate exchange of goods, services and assets directly. This is because, unlike banks, money market funds, and long-term mutual funds, they do not offer liquid liabilities. Nevertheless, pension funds have had an important indirect role in boosting the efficiency of the financial systems, by influencing the structure of securities markets. Pension funds demand liquidity themselves and help generate it by doing so.

Pension funds should not only get a good return on their investment but also use their influence over countries to increase social and economic welfare. As mentioned before, pension funds invest a lot in the stock market and by doing so they get a right to vote at the shareholders' meetings and influence the company management strategy.

By demanding liquidity, pension funds help to generate it, firstly by their own activity in arbitrage, trading and diversification, secondly via the fact that liquidity is a form of increasing return to scale, as larger markets in which pension funds are active attract more trading, reducing costs and improving liquidity further. A third effect arises from funds' countervailing power as they press for improvements in market structure and regulation. These include deregulation and reduction in commissions,