Blog 29: Pensions by Xavier Lo, FIA, FRM, MBA

The topic today wraps a few blogs together into something that most of you won’t even think about for maybe 20 – 30 years. That is pensions [退休金]! Pensions can be broadly split into Defined Contribution [定額供款] (DC) and Defined Benefits [設定利益] (DB) – and DB is the area where actuaries are needed, although the demand is dying down [夕陽行業] as a lot of companies in the world are broadly moving to DC schemes for their employees. Why? Well…

Defined Benefits pensions is basically where you get a defined amount of money when you retire. This is usually dependent on how long you’ve worked for the company [年資], and your salary [人工] at the company. Given that the company will have to somehow find a way to fund the large amount of money for you when you retire, a big part of the risk lies with the company. That’s why actuaries are needed to help mitigate this risk [減低風險].

Defined Contributions is when you put in a defined amount of money into a pension fund [退休基金]. The fund money is invested in certain assets [資產] where it hopefully grows a lot. When you retire, you get whatever the value of your pension fund is. Hopefully you can see how the risk is now transferred to you now, as it is up to you to make sure you have enough money to retire.

Now that we know what the two different pension types are, does this answer why a lot of companies in the world are moving to DC schemes? Its just simply less financially risky for the company! As most, if not all, of my readers are young actuaries, you probably don’t really think about your own pensions much. However, now that you know what DC schemes are (which is likely what your pension is), you can combine this with the knowledge from my Power of Time and Annuities blogs. Hopefully this will make you realise how its something worth caring about now!

Xavier Lo, FIA, FRM, MBA
Qualified fellow actuary (in UK and Hong Kong), Financial Risk Manager, and MBA graduate (listed on the Dean's List) with a passion for insurance, data science, and analytics. Experienced in a broad range of insurance roles (pricing, capital modelling, reserving, ERM), along with a touch of knowledge in banking. Member of the General Insurance Committee (2021), Actuarial Innovation Committee (2019 - 2021) in ASHK.
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