How can I tell if a pension fund is healthy?

Choosing the right pension fund has a direct impact on your employees’ pensions – and your appeal as an employer. But how can you tell if a Swiss pension fund is good and healthy?

Basic questions and terms

How can I tell if a pension fund is financially stable?

If you want to check the stability of a pension fund, you should take a look at the annual financial statements. It contains key information on the foundation’s financial and structural situation.

From a financial perspective, the funding ratio is informative: A high funding ratio indicates a solid financial risk capacity because the higher the funding ratio, the better the ratio of assets to liabilities. The following is a helpful guideline: The funding ratio should be over 100 percent.

Another important indicator of a good pension fund is the ratio of active insureds to pensioners. A lower proportion of retirees indicates that the pension fund has a solid structure. In addition to the ratio of active insureds to the number of pensioners, the allocation between mandatory (OPA) and extra-mandatory retirement assets is also relevant, since extra-mandatory retirement assets increase the Foundation’s flexibility.

More in-depth information on how to evaluate whether a pension fund exhibits healthy performance can be found in the “Key Figures and Performance” section.

Is there a legal framework to ensure stability?

The legal framework for pension funds can be found in OPA (in German) and its associated ordinances. These OPA provisions take precedence over the provisions issued by the occupational benefits institution.

According to OPA, every occupational benefits institution is obligated to organize itself in such a way that it can fulfill its mandate. Every occupational benefits institution is essentially free within the scope of the law to structure its benefits, financing and organization. The Board of Trustees has a central role to play in this. On the one hand, it defines the organization of the pension fund. On the other hand, it ensures its financial stability and monitors management. The actual implementation is set out in its regulations. For this reason, it’s worth taking a look at the foundation’s regulations, such as the organization regulations and investment regulations, before you switch.

Where do pension fund assets go?

Under the regulatory contributions paid by the employer and employees, a distinction is made between savings and risk contributions. They are deducted from employees’ salaries each month:

1. Savings contributions increase the asset side of the foundation’s balance sheet – i.e. the assets – while they are credited on the liabilities side to the retirement assets of the active insureds. This also applies to single premiums such as vested benefits and purchases. If an insured leaves the pension fund, the retirement assets they have saved up are transferred to the new pension fund as vested benefits. On retirement, retirement assets are used to finance retirement benefits (pension, lump sum or a combination of the two). 
2. Risk contributions serve to finance risk benefits in the event of death or disability due to illness.

The foundation’s assets are invested in accordance with the investment regulations. The foundation sets out its investment strategy in the investment regulations. The pension fund can make use of internal and external asset managers (Asset Management) to implement its investment strategy. The Board of Trustees is responsible for monitoring the investment process.

Key Figures and Performance

What are the key figures for assessing a pension fund?

The performance and stability of an occupational benefits institution can best be assessed using the key figures below. Always consider a multi-year period. This is the only way to see the medium and long-term performance of a pension fund.

• Funding ratio: Significant overfunding (high funding ratio) builds trust and indicates sound financial management. In the event of underfunding (funding ratio of less than 100 percent), a distinction must be made between: temporary phase due to a slump in the financial markets – or long-term instability?
• Investment performance/returns: The investment returns tell you what income was generated. However, looking at returns in isolation does not go far enough. More interesting is how the return compares with the selected benchmark and how the foundation uses the return financially.
• Interest on retirement assets: The returns generated are also reflected in the interest paid on retirement assets. A high level of interest over the last three to five years is therefore a sign that the pension fund is performing well. 
• Portfolio development: If many companies or insureds have joined the pension fund, this indicates stability.
• Technical interest rate: This mathematical interest rate is used by a pension fund to calculate how much capital it will need today to pay out future pensions. The technical interest rate should reflect the pension fund’s expectations for long-term returns, its risk capacity and its structure. It must therefore be chosen with caution.
• Fluctuation reserves: Fluctuation reserves are a financial buffer that are created to offset value losses in the event of market turbulence on the financial markets. The higher these financial reserves are, the better.
• Conversion rate: The conversion rate determines the percentage rate with which the retirement assets you have saved up are converted into an annual pension when you retire. You should also check whether the pension fund offers more flexible options for drawing retirement benefits.

Performance of a pension fund – what does that mean?

Performance refers to the percentage performance of the invested pension assets. The return shows whether and to what extent the pension assets are yielding:

• If the annual return is positive, pension assets have increased. The investment income generated serves to pay interest on the retirement assets and to form reserves.
• If the annual return is negative, assets have shrunk.

Saving and growing retirement assets are long-term goals that are generally planned for a period of forty years or even longer. That’s why you should also look out for multi-year returns when checking your pension fund. For example, the average performance over five or ten years is a useful indicator of the stability of the pension fund.

How do I compare the performance of different pension funds?

A meaningful comparison is very difficult because of the various pension plans and different investment strategies. It’s best to ask a pension expert for advice.

What influences performance?

The investment strategy defined in the investment regulations has the greatest impact. In order to determine these risks, the Board of Trustees assesses the investment-related and actuarial risks. In doing so, it takes into account the liquidity requirements, the risk capacity of the pension fund and the minimum required income from assets.

This is the basis the Board of Trustees uses to determine the investment mix, i.e. the proportions of pension assets to be invested in equities, bonds, mortgages, loans, real estate or alternative investments.

How do I find out about the investment performance of my pension fund?

The Board of Trustees of a pension fund is responsible for financial reporting. It provides an annual report (or annual financial statements) to present the actual financial situation of the occupational benefit institution. This includes the actual implementation of the investment strategy defined in the investment regulations. The pension fund generally also discloses the key figures on its website. Use this option to get a regular overview.

Duty to provide information and auditing

Summary and tips

Which pension fund will work for my company? We have put together some helpful tips for you.

Which is the best pension fund?

There is no one-size-fits-all answer, as there are many good pension funds – the deciding factors depend on what matters most to your company and your employees. If you're looking for higher returns on your retirement assets, then this will influence your choice of pension fund. The same applies if you want the minimum risk. As your needs have a major impact on the choice of your preferred pension solution, we recommend that you seek professional advice. This will help you find the offer that best suits your company.

When choosing a pension fund, consider not only its key figures and performance, but also whether your individual pension needs are covered. Ideally, you should also consider the following aspects when choosing a pension fund:

• Flexibility in defining the benefits to be insured
• Personalized advice for employer and insureds
• Online information and simulation tools for employers and insureds
• Sustainability in investments

Checklist: The four most important criteria for evaluating a pension fund

Assessing a pension fund is a complex task. These criteria will help you assess whether your pension fund is good:

1. Pension plan: Compared with full-value insurance, the semi-autonomous solution offers significantly better opportunities for a higher investment return – and hence better interest on the retirement assets. However, the affiliated companies do bear some of the investment risks. If there is a high level of underfunding, restructuring measures cannot be ruled out.
2. The ratio of active to passive insureds: The higher the proportion of active insureds, the better its impact on unwanted cross-subsidization. A low average age of working insureds also favors long-term asset inflows.
3. Asset allocation: The way the asset classes are selected and weighted has a significant impact on performance. So it makes a big difference whether the equity component is 15 percent or 30 percent.
4. Long-term outlook: Investments and portfolios are subject to fluctuations in value. Some years will see poorer performance. For this reason, consider a pension fund’s long-term net performance when assessing it.