Ykhjuy

Pension pot is the money, the employee and sometimes the employer and the government pay that gets accumulated into pension fund.

But my question is, that this pension fund is basically a bank account, and does this account get interest over the years?

I need to know this because I want to understand pension calculators better.

The companies have access to a big sum of money over the years and they pay it gradually as people retire but there's a capital accumulation that does not change since anyone who retires gets replaced by a new employee which will pay the same contributions. Do the companies have any authority to use this money? For example to invest in some other companies to make the accumulation bigger? Can they get interest on this money and possibly use it for themselves without giving it back to employees? Or do they pay the accumulated money plus the interests to them?

I'm not a native English speaker so it is possible that I misused some terms here but I hope it's understandable.

There are two main types of pensions:

(1) Defined Benefit pension plan. This type is the 'traditional' pension plan. It means that when you retire, you get a benefit based on, generally years of service & salary over that period. Even if the market fails, the company still has a legal obligation to pay out the pension, and depending on jurisdiction, probably there is even some form of insurance / protection to try and keep the pension plan paying out, even if the company itself fails. The company likely has a legal obligation to keep the pension plan well-funded, meaning it can't just use new contributions from new employees to pay out retirees - if the market returns on the invested 'pot' are poor, the company will need to contribute additional money to allow for future amounts to be paid properly.

This type of plan works by having employees pay into a the 'pension pot', and the company invests that money, plus additional money contributed by the company directly, into the market. This places the risk of market failure on the company, not the individual.

(2) Defined contribution pension plan. This type is becoming more common, because of the risks associated with the defined benefit plan. Here, the employee contributes money to their own personal 'pension pot', and the employer likely puts in some money as well. It is then up to the individual to choose how to invest that money [quite likely there is a limited number of options to choose from, decided by the company when they set up the plan].

Here, things work partly as you are guessing - the money invested earns interest, dividends, and capital returns, based on where the money is invested. However note that new employee contributions are for those new employees only - no one else pays for retiree payments once the company has put in the initial contributions.

There is a third type of pension plan, government run, which operates by having the whole population pay an additional tax, and pays out from that tax, to all retirees. This operates exactly as you are indicating - new workers effectively pay for the retirees to keep getting their pension. In the case where there are few new workers but many retirees, that can put a severe strain on taxing the smaller workers.

Pension funds are invested, mostly in bonds and equities, and the interest and dividends are added to the funds, which (in the case of defined-benefit pensions) would not be large enough to meet their obligations without the income and capital growth. The money remains in the pension fund and can't be used by the company (except that if the pension fund runs a surplus, the company may be able to reduce or pause its payments into the fund).