In the general sense of the word, a pension fund is a financial institution founded by a middle entity at the request of a company or a governmental organization. The main purpose of these funds is to reach a sustainable growth in order to provide payments for the retirement period of the employees who are covered by the plan. Normally, the assets managed by retirement funds are considerably larger than those of other investment funds, in a way that in most countries these funds are considered as the largest financial and investment institutions.

In Iran, the first legislation regarding retirement can be dated back to the period after the Constitutional Government in 1287(1908) and the law of Duties. However, this law had only paid attention to the inheritors rights and their social support and pension or disability insurance had not been considered. In 1301(1922) the first legislation regarding social insurance for employees was enacted which, in addition to inheritors rights, had paid attention to an income for the retiree and the disabled. Retirement laws have been reviewed several times and some organizations have adapted these laws according to their own policies.

Pension Funds active in Iran are consisted of insurance and non-insurance systems. In general, in Iran approximately 50 percent of the work force and 60 percent of the elderly are covered by pension funds.The insurance system which supports the retiree and the elderly by paying them a fixed monthly salary is the administrator of the country’s pension affairs through the Social Security Organization and the Civil Servants Pension Organization along with a few private or union pension funds. Besides the insurance system, the non-insurance support system has also been covering specific groups and parts of the society. Among major institutions active in this field we can name the State Welfare Organization, Imam Khomeini Relief Foundation, Foundation of Martyrs and Veterans Affairs, Islamic Revolution Mostazafan Foundation and Khordad 15th Foundation.

The general structure of the country’s pension fund can be demonstrated in the following table:

Social Security Fund Insurance System Pension System
Civil Servants Pension Organization
Union Funds
State Welfare Organization Non-Insurance System
Imam Khomeini Relief Foundation
Foundation of Martyrs and Veterans Affairs
Islamic Revolution Mostazafan Foundation
Khordad 15th Foundation


An important point regarding the insurance system is that in this system the insurance coverage is approximately 80 percent of the work force in urban areas, but is much lower in rural areas. This depicts one of the main shortcomings of the pension coverage in the country, since villagers who constitute a considerable portion of the low income segments of the society, do not enjoy insurance and pension coverage and its advantages during their old age or in case of disability.

The most important financial institutions that are active in this sector are the Social Security Organization, Civil Servants Pension Organization and union pension Funds. These funds procure their resources from premiums paid by those eligible, as well investment income and in some cases from a budget allocated by the government. The main usages of these funds also include payments to employees and pensioners, unemployment insurance and the voluntary severance from employment. Moreover, other organizations and institutions that are active in this field are administered by laws and regulations of the employer organization. The most important factor is that employees allocate a percentage of their monthly salary in hope of receiving a minimum income during their retirement or in case of disability.

One of the most important complexities facing the above mentioned funds is that they have been transformed into a source of financing for the government. Governments, since the past, used to solve their liquidity problems by transferring the ownership of assets or companies with low rates of return, to pension funds with a price much higher than the fair market price. A long term repetition of such practice resulted in the departure of assets with high liquidity and return in order to provide the liquidity required for cash flows. On the other hand, the sinking down of the assets that do not possess the necessary liquidity to provide the requirements for outgoing cash flows, and therefore these funds would face financing problems much earlier than anticipated.

Other problems that aggravate this situation are the briefness of the period during which the directors are in charge and the direct selection of these directors. Directors that are in charge for a short period of time in pension funds will be more willing to acquire the satisfaction of those in higher positions and less eager to launch long-term strategies, since it is probable that the subsequent director that will take charge might not believe in the same strategy and instead pursue his own view point in managing the fund. This fact, apart from the reducing the period that directors have considered to be in charge, will impose establishing costs to the fund numerous times. Moreover, examining the economic history of countries reveal that whenever the capital of the private sector has been combined with that of the public sector, it has mainly provided the ground for corruption and economic rent and has gradually resulted in a diminished trust by the private sector.

Given that managing mechanism in pension funds is different from that in other financial institutions; therefore in order to achieve their objectives, the directors of these funds should take a few points into account before planning. The investment mechanism in these funds is long-term; for instance a 25 year old person whose salary is partly deducted to provide its retirement income and benefits and will be active for a period of 30 years, bearing in mind that average life expectancy in the country is 75 years, if this person lives for 20 years after his retirement and is eligible for receiving pension, then he/she will be considered as being eligible people in the fund for 50 years. Therefore, this time span should be taken into account in the planning that is done for the management of investment funds.

One of the elements that should be taken into account in managing pension funds is the simultaneous management of investment and cash flow. This is while active pension funds of the country take into consideration investment management and do not consider cash flow management in their strategies. Cash flow management is important from the point of view that these types of funds experience an ample size of incoming and outgoing flows in every financial year, therefore, an accurate and comprehensive planning should be prepared in order to provide necessary outgoing cash flows in case of lack of liquidity.

In addition to the above mentioned points, attention to demographic structure is indispensable. The country’s population in 1357 was approximately 38 million people, a number which reached 80 million people in 1395; the average age of marriage in the country had been 18 years and fertility rate was equal to 6.3 percent during 1357 and have reached the levels of 30 years and 1.7 percent in the current year, respectively. This data reveals that considering the increase in the population of elderly in the country, the outgoing cash flows of pension funds will increase significantly in the near future in order to pay their pension salaries. This is while as a result of the ageing of the country’s age pyramid and he diminished birth rate, the incoming cash flows including premium payments will decrease, a fact that highlights the importance of cash flow management. If the minimum age for retirement is considered around 65 years old, then during the first few years following the Islamic Revolution the share of this age group within the entire population had been 2.9 percent, which has currently reached the level of 5 percent, implying a stronger need to pension payments in the future. A selection of demographic data is provided in the below table:

Year Total Population (million people) Population up to 14 years Population between 14 and 64 years Population above 64 years Population Growth (percentage) Fertility Rate (percentage) Life Expectancy
1357 37.2 43 54 3 3.5 6.4 52
1362 45.4 45 52 3 4.1 6.4 47
1367 54.7 46 51 3 3.1 5.1 59
1372 59.5 43 53 4 1.2 3.5 67
1377 64.7 36 59 5 1.8 2.4 69
1382 69.3 28 67 5 1.2 1.9 70
1387 73.4 24 71 5 1.1 1.8 72
1392 78.1 23 72 5 1.3 1.7 74
1395 80 23 72 5 1.1 1.7 75


Demographic data shown in the table above reveal the fact that in a near future Iran will face a retirement crisis. Presently, investment funds receive a monthly premium from workers and in return tend to pay pension salaries to the retiree, showing the low efficiency and return in investment activities of pension funds. Now considering the ongoing changes in the country’s demographic structure, it has become more likely for pension funds to get caught in the retirement trap. The retirement trap implies that considering the ageing demographic structure of the country, the number of people who pay insurance premium will decline gradually while the number of those receiving pension will rise, and in case the trend in managing these types of funds does not change, monthly payments to the retiree will most probably be postponed. So, in order to prevent such crisis from occurring, it is advised that fundamental changes take place in the management of investments and cash flows of pension funds. On the other hand, it is suggested that the management of investment funds be handed over to the private sector so that the period during which the directors take the office is increased, and also since the income of the private sector depends upon the efficiency of the fund and no budget is allocated to them by the government, therefore a more efficient investment using people’s resources will be made in order to prevent the anticipated economic crisis and its social repercussions expected in the upcoming future.