Having to make a choice can be difficult – the managing directors and HR managers of SMEs in particular know this to be true. They make key decisions everyday for their companies: from recruiting, to delegating responsibilities, to choosing a pension fund for their employees.
This last decision requires thorough consideration because it affects the financial future of the company’s most important resource – its employees. If companies (SMEs in particular) are unable or unwilling to create their own pension fund, they can join a collective foundation. The trend in company retirement plans is moving away from full-value insurance toward semi-autonomous pension funds.
This is not a simple question to answer. Depending on whether your company is looking for maximum security or a higher interest rate on retirement savings, this will determine whether full-value insurance or a semi-autonomous pension fund is the right solution for you. We have drawn up a comparison of both semi-autonomous pension solutions and full-value insurance solutions. Our conclusion: In the current environment, insureds have considerably better long-term prospects with a semi-autonomous collective foundation.
With semi-autonomous pension solutions, the collective foundation bears the investment risk itself. But this also means that it can take full advantage of any investment opportunities. When markets trend higher, insureds benefit from higher interest on their retirement savings, which means a larger retirement pension.
Interest on retirement savings helps determine how high their future retirement pension will be. It makes a vast difference whether the retirement savings earn the current 1% interest under the OPA minimum interest rate or over 2%, which is possible with a semi-autonomous solution. Thanks to compounding interest, retirement pensions could be as much as 20% higher! Together with a higher conversion rate, retirement pensions could even be up to 30% higher than a full-value insurance solution.
As far as corporate retirement funds go, this is a big advantage given today’s low interest rates and in view of demographic developments in Switzerland, i.e. the population pyramid and the shift from active insureds to retirees.
Semi-autonomous collective foundations must also credit statutory retirement savings using the OPA minimum interest rate, which in the worst case could lead to the collective foundation being underfunded in times when negative income is generated. Such instances are viewed as exceptions, particularly in the case of collective foundations with very solid financial and structural requirements (high coverage ratio, low technical interest rate, good aging structure, low ratio of pensioners, large percentage of additional voluntary retirement savings). A risk-aware and sustainable investment strategy with broad diversification provides additional stability. So what does full-value insurance offer?
Guaranteed risk assumption has its price: As full-value insurance from life insurers is subject to strict regulations, pension funds are very conservatively invested, which often means that the equity component is less than 5 percent. This is why even in good investment years insureds can only expect to see scant interest that is barely higher than the statutory minimum interest rate. Persistently low interest rates, rising life expectancy and stiflingly strict investment rules make it difficult for full-value insurance to generate returns that are capable of financing the extensive guarantees that are required. This results in either unattractive risk premiums that are hardly in line with the market or highly selective admissions for new companies.
Both semi-autonomous pension solutions and full-value insurance solutions have their pros and cons. A look at the Swiss pension fund market shows that demographic changes, rising life expectancy and prevailing low interest rates have put so much pressure on full-value insurance that many providers of full-value insurance solutions are switching to semi-autonomous solutions. The number of remaining providers can be counted on one hand.
In order to provide Swiss SMEs and their employees sustainable and high-performing Pillar 2 solutions, AXA has only offered semi-autonomous pension fund solutions instead of full-value insurance since the start of 2019. This is because the "third contributor," i.e. interest, has a far bigger impact on semi-autonomous solutions with their broadly diversified asset allocations than on full-value insurance, where investment options are heavily restricted by regulations.