Investopedia defines a 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 contributions from both the employer and employees forms an asset pool which is then invested in stocks, bonds and other avenues to generate growth and to produce enough income to cover the employees' pension when reach their retirement age.
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In a defined-benefit pension plan, it is the responsibility of the employer to assume the risk of investments and to see that employees get their benefits no matter what happens to the investment. The employers ensure the stable growth of their pension funds by investing a major portion of their assets in stock because in the long run the
stock market provides the best return on investment. In fact, when the economy was in good condition most pension funds had a surplus in their accounts. However the stock market crash eroded the value of pension funds and as of 26, July 2010, the aggregate shortage of all pension plans in the S&P 500 Index is a staggering $227 billion. According to Hewitt Associates' Pension Risk Tracker, the funded ratio of all pension plans in the S&P 500 Index was around 80% at the end of June 2010. This means that the value of assets in the funds are 20 percent short of covering the benefits due to the employees.
