How do private pension funds operate?

Good question. Very good question in view of recent history. The answer depends on what country you are talking about, and whether you mean corporate (i.e., employer-run) funds or totally private funds (like IRAs (USA), RRSPs (Canada), stakeholder pensions (UK), Third Pillar (France, Switzerland, etc.)). US 401(k)s and TSPs (for federal employees, details at http://www.tsp.gov/ ) are something of a hybrid because there is (usually) an employer contribution.

I'm going to assume you mean the first kind, because that's where most of the politics and grievance and crises are. Although 401(k)s, especially Enron's, are not without fraud and grief.

In the high-flying 1990s employers argued that their pension funds were over-funded and got permission, or sometimes unilaterally, took pension holidays or clawed back money from their funds. After the market crash, of course, the funds were no longer over-funded, but the firms didn't pay back the money. They couldn't -- much of it had been given to top management as bonuses.

Indeed, over the past decade or so top executive compensation (including pensions) has skyrocketed while middle management and below have lost ground, or barely kept up.

Meanwhile, pension funds have been scaled back, and "defined benefit" funds terminated. (Like civil service pensions, defined benefit funds pay a proportion of final salary (or average salary over a fixed period of years) for each year worked.) Most replacement funds are defined contribution funds, often 401(k)s.

Top management usually have a special, and much better, deal.

The funds (other than 401(k) and the like) are managed by professional fund managers, often mutual fund managers, who get a percentage. Recent studies in Britain have said that but for the tax benefit, management charges are so high that some pension beneficiaries would have done better (in recent years) in a savings account!

The bigget problems are (1) where pension funds are invested too heavily in the sponsoring firm's shares (this is supposed to be regulated, at least in the USA) and those shares tank; and (2) where the funds are under-funded and the firm is insolvent or otherwise unable to meet the needs of the fund to pay scheduled pensions. Recently companies have been terminating their funds and (in the USA and UK) getting the government pensiion insurer to take over the obligation. In the USA that has been -- especially for the airlines and the firms swallowed up by the asbestos litigation -- through Chapter 11 bankruptcy.

There's a lot more to say, but no more time. Sorry.