Advantages and disadvantages of collective/common institutions and individual pension funds

Comparison of pension fund management forms

The choice of management form for the pension fund depends on various factors. There are various reasons for joining a collective/common institution or an individual pension fund.

The results of the pension fund survey taken by over 100 decision-makers from independent pension funds as well as collective and common institutions show that there are clear differences between the two management forms in terms of pension fund management (governance) criteria and self-determination options.

Discharge of responsible persons

At more than 60%, the strongest argument in favor of a collective and common institution is the discharge of responsible parties on the employer and employee side. The great personal responsibility of foundation members does not seem insignificant to many people.

The profile of requirements for a board of trustees member is broad, constantly increasing, and entails responsibilities that may even involve personal liability in extreme cases. This may also show that the current militia principle toward consolidation is likely to contribute to collective and common institutions.

High level of professionalism and expertise in collective and common institutions

In addition, more than half of the respondents agree that the high level of professionalism and expertise is a good argument for joining a collective and common institution. Only 9% believe that an individual pension fund is better. Many people may assume that the larger the pension fund, the more competent the managers will be.

The size of collective and common institutions is also likely to give them an advantage in the areas of digitalization and security, as well as in terms of costs. Many processes are still being carried out non-digitally and with a lot of paper at pension funds, but also at collective and common institutions. Improving access to information for the beneficiaries incurs additional expenses. As a rule, the necessary investments and costs per capita can be reduced as the size increases and can therefore be better justified.

Collective and common institution survey results compared to individual pension funds

Excerpt from survey results on membership of collective and common institution vs. individual pension fund

Proportion of responses to the question: "Do the following criteria generally apply to a pension fund of an individual employer (individual pension fund) or to membership of a collective or common institution (excluding full insurance)?" in %
Source: Credit Suisse Pension Fund Survey 2023

Higher risk capacity despite poorer predictability

In principle, younger insured persons are in favor of greater risk capacity for collective and common institutions. A majority of survey participants also confirm that collective and common institutions have a higher overall risk capacity. In contrast, independent pension funds perform better when it comes to the predictability of the portfolio of insured persons.

The planning ability of the insured persons can only be considered an important factor in assessing their risk ability to a limited extent. Many pension funds have taken measures to contain the risk of large outflows of insured persons, for example by diversifying to different employers.

More flexibility in pension fund management 

One characteristic that is very clearly considered to be an advantage of individual pension funds is the flexibility in pension fund management. Although various collective institutions now allow a high level of individualization, this is not considered comparable to the degree of self-determination provided by an individual pension fund.

Individual pension funds are also more convincing than collective and common institutions when it comes to the individuality of the investment strategy. Among other things, this has to do with the fact that common institutions generally pursue a common investment strategy and thus apply the same asset allocation to all the contributions made. 

Strong relationship between employer/board of trustees and the pension fund

The strongest criterion favoring an individual pension fund – as cited by around 89% of participants – is the stronger link between the employer/board of trustees and the pension fund. Especially in the case of small to medium-sized enterprises, this interpersonal component is likely to be even more important. A committed employer is also extremely important, especially in turbulent times, or during restructuring measures in extreme cases.

Overall, there are clear distinguishing features for both management forms and therefore good reasons for or against choosing a particular form. This justifies the existence of both management forms. However, the consolidation seen in recent years also indicates that (partially) autonomous collective and common institutions can very well meet the needs of many – particularly small to medium-sized – companies and pension funds.

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