Pension funds were created to provide employees with a supplementary pension, in addition to the pension paid by public social security institutions. State pensions usually operate through the principle of redistribution (workers' social security contributions fund the pensions of already retired workers). Through pension funds, workers accrue a portion of the income they receive during their working life, according to the principle of capitalisation: regular payments by the subscribers contribute to a fund managed along financial lines, according to the clients’ risk tolerance. Clients can choose among various types of managed funds: shares, bonds or balanced funds.
At the end of the agreement, typically a long-term contract, ideally lasting the full working life of the insured, a monthly annuity is paid. This varies according to the contributions made, the duration of the policy and the return on the investment. Pension funds can be open or closed (also known as negotiated funds). Open funds are available to any person in employment, while closed funds are reserved for specific professional categories, as the funds are established on the basis of agreements between trade unions and business organisations for specific industries.
Further individual supplementary pension plans are available to anyone wishing to create a supplementary pension (including, for example, people not in employment or students). These are personal pension plans, which provide more investment flexibility and allow people to stop, and later resume, payments into the pension without penalties and without having to break the contract. Payment of benefits to the policyholder are ruled by the same constraints are for collective funds (e.g. full payment into a lump sum is not allowed).