Second pillar: Collective and common institutions are on the rise
The second pillar is in a state of flux. Collective and common institutions are becoming increasingly important within the second pillar, while the number of company-owned pension funds and the full insurance model is declining.
Stable number and growing share of assets
Since the introduction of the Federal Act on Occupational Retirement, Survivors' and Disability Pension Plans (BVG) in 1985, the number of pension institutions has been steadily decreasing. There were around 15,000 pension funds at the beginning, 2,935 in 2004, and only 1,389 by the end of 2021. In contrast, the number of collective and common institutions has remained stable.
At the same time, the assets of collective and common institutions increased as a result of natural growth in employee benefits insurance and funds from pension funds that joined the collective and common institutions. Measured on the basis of the balance sheet total, the share of collective and common institutions in the second pillar was 14% in 2004, 20% in 2013, and it even reached 50% in 2021. Since 2014, asset growth in the second pillar has been almost exclusively the same as that of the collective and common institutions.
The majority of all insured persons in collective and common institutions
The increased assets are reflected in the distribution of insured persons and pension recipients. Of around 4.5 million active insured persons, 73% belong to collective and common institutions. This proportion was still 53% in 2004, with a total of 3.2 million insured persons. The trend among pension recipients is similar: In 2021, 57% had already received their pensions from a collective or common institution, compared with 25% in 2004.
Regulatory pressure and risk considerations drive consolidation
An important reason for the long-term consolidation process is the increasing regulation, which is more difficult for small pension funds to stem. Employers may also seek to join a collective and common institution because finding suitable employee representatives on the Bord of Trustees is often difficult, not least considering the associated responsibilities and assumed liability risks. In light of these elements, it can be assumed that consolidation will progress, at most at a somewhat slower pace.
Similar investment strategy despite different risk profiles
Until a few years ago, the average investment behaviour of collective investment institutions and other forms of management differed. For a long time, the equity allocation and the real estate ratio of collective investment funds have been below that of other pension funds. In return, the weighting of liquid assets was higher.
In parallel with rising assets, however, there has been a continuous alignment of the equity component over the last decade. One reason for this performance is likely to be the increasing competitive pressure: Performance levels like those of other pension funds could only be achieved through investments that are similar to those of other pension funds. In addition, the steady transfer of full insurance models to the (partial) autonomy of collective foundations could have led to a more cautious investment strategy at the beginning.
Lower age structure should increase risk ability
The investment behaviour of collective and common institutions compared to other pension funds, which is now very similar, is surprising at first glance, since collective institutions in particular have a younger age structure on average.
A situation that has a positive impact on risk capacity. At the end of 2021, the proportion of active insured persons in the pension capital of active workers and pension recipients in collective investment schemes was higher at 66% than in other pension funds (59% for common institutions, 58% for pension funds of a single employer, 52% for pension funds of several employers).
Higher outflow potential and potential dilution effects
While the younger age structure generally increases the risk capacity of a pension fund, it also has disadvantages in the case of collective and common institutions. The outflow potential of collective and common institutions with movable active insured holdings is higher.
While pension funds with one or more employers are dependent on personnel development within the affiliated companies, collective and common institutions are generally exposed to cash inflows and outflows of their affiliated companies. The potentially higher cash outflows make it more difficult for collective and common institutions to plan their insurance holdings and increase potential dilution effects.
Return targets also influence the investment strategy
In addition to risk capacity, the return target is considered the second key factor influencing asset allocation. In the case of pension funds, this return target is determined by the interest requirements on the pension capital of active insured persons and pension recipients and the financing of any additional costs.
Due to the equity ratio of collective institutions being lower for a long time, these also historically have the lowest returns. In contrast, the returns of common institutions are similar to those of other pension funds. From 2004 to 2021, collective institutions achieved an annualized net return of 3%, common institutions 3.6%, pension funds with only one employer 3.5%, and pension funds with multiple employers 3.8%.
Regarding the interest rates on their retirement assets, collective and common institutions do not show any significant differences compared to other pension funds. For a long period of time, the interest on their retirement assets was higher, but it has gone down in the past five years.
Competition in the second pillar for the benefit of the insured members
Collective and common institutions' interest in growing and acquiring new connections contributes to an attractive and diverse range of pension solutions. This is reflected in the competitive level of benefits in terms of the interest on retirement assets and the conversion rates. While the former do not show any lasting differences, conversion rates are, on average, higher than those of the other pension funds. In order to be able to offer attractive services, the collective and common institutions also strive to optimize and make processes and organizational aspects more efficient.
In the competitive environment of collective and common institutions, attention must be paid to the conflict of objectives between growth and stability. More attractive performance parameters, such as the conversion rates at present, must be affordable in the long term in order to ensure the stability of pension funds and thus retirement benefits. As around half of all assets in the second pillar are now placed with collective and common institutions, they have a systemically relevant responsibility.