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Financial Dictionary - Pension funds

Pension funds

Pension funds are those assets without legal personality that are created to meet the objectives of the pension plans. Or more simply: they are a type of investment funds to manage capital from pension plans.

Customer contributions to pension plans provide them with the funds they need to invest in a variety of products (stocks, bonds, and so on), allowing them to profit from their investments. These are long-term savings products, which are designed to cover retirement and other contingencies covered by these plans.

Pension plans and pension funds are sometimes confused as one and the same, though in actual fact they are two distinct concepts.  

Difference between pension funds and pension plans

Both products differ in that:

pension plans are made up of money that customers contribute on a regular or one-off basis. And then the funds use the money contributed to the pension plans and invest it in different financial products (such as bonds or shares) and manage to get a return.   

Pension funds are the financial product that customers buy from financial institutions.. They then make contributions in order to save money and earn income when they retire. The money contributed by the customer is incorporated into a pension fund, which will manage the money.   

Pension funds can be created to implement one or more pension plans.

Although a pension fund can be established for a specific pension plan, it is more customary for a single pension fund to manage the funds of multiple pension plans. In other words: a pension plan may belong to a single fund, but a pension fund may be an umbrella fund for one or more pension plans.    

The pension plan is considered a savings product, while the fund is an investment product.   

The fund requires an entity to manage its capital, a figure that does not exist in pension plans.   

Administration and control of pension funds

The managing institutions are in charge of managing and controlling pension funds, as previously stated. 

In the case of Spain, these pension funds are supervised by the Directorate-General for Insurance and Pension Funds.  

What types of pension funds are there? 

As with other financial products, pension funds can be classified based on different criteria. Depending on the type of pension plan, they can be personal or occupational, if they are part of occupational plans; depending on the responsibility for payment, they can be internal or external; finally, depending on investment processes, they can be open or closed.

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