Switching pension funds. Key considerations regarding pension solutions.
Choosing a pension solution is an important decision for employers. Careful consideration is necessary in order to determine whether switching pension funds will actually benefit both the employer and the employees. Martin Jucker, Christina Vettas, and Markus Büchi, members of the Executive Board of Spida Social Insurance, explain how companies should proceed when switching pension funds.
How important is a company's choice of pension solution?
Martin Jucker: It is an extremely important decision. For the company's human resources policy in particular, but also for the company itself. A tailored pension solution is now a must, rather than being simply "nice to have." Without a tailored solution, there is a risk of being over- or underinsured.
It is also a good idea not to focus solely on the second pillar when deciding which pension solution is the right fit. Some industry solutions offer the first pillar, second pillar, and family compensation office in one, which is generally highly cost-effective.
How often should companies review their existing contracts?
Christina Vettas: In principle it is a good idea to review existing contractual relationships on a regular basis. Companies and their employees change constantly, which means their needs also undergo change. As staff are promoted and command higher salaries, for instance, there are new demands on the pension solution, and a change in staff structure or a merger could change the needs of the company as a whole. Reviewing the contracts every five years or so generally allows companies to cover all these points and take account of any changes.
What questions should companies be looking to answer during the review process?
Christina Vettas: The first question is always whether or not the current solution is still appropriate. Both now and for the future. If it is not, the selection criteria for a new solution must be determined. Is the death and disability benefit level still appropriate, for instance, or does it need to be increased? It is it necessary to take out insurance for middle management in order to best reflect the current staff structure?
What factors and ratios should be considered for any new pension solution before making the switch?
Markus Büchi: The coverage ratio of the fund is one important consideration, of course – it provides an indicator of restructuring risks and performance improvements. There are also some other important ratios to consider: The ratio of the retirement capital of the active insured to that of pension recipients, the cost-effectiveness of the fund in terms of the management costs per actively insured person, the scope of the risk and management costs as well as historical investment performance, and the average rate of return on retirement assets.
Martin Jucker: In the case of collective foundations or common institutions, these figures can be found in the annual report. The figures are subject to special accounting principles and therefore provide a very good basis for comparison. This further simplifies the process.
Are there any other features that should be reviewed?
Martin Jucker: The main thing is to ensure that benefit levels are appropriate for the insured and that there is not an over/underinsurance scenario. Another interesting consideration is the type of risk assumption, i.e. whether to join an autonomous pension fund or a full-coverage insurance scheme. The structure of the pension fund must also be factored in. Should you join a collective foundation that gives you more co-determination rights and obligations? Or a common fund that removes the burden of organizational costs, in the form of an intercompany Board of Trustees, for instance?
Digitalization is also having an impact on pension solutions. How can insured persons benefit from a pension solution that includes comprehensive digital processes for the first and second pillars?
Christina Vettas: One major benefit is that error sources are reduced, particularly if there are direct interfaces between the software of the insured company and that of the pension fund. Manual data entry is no longer necessary for insured salaries, for instance; it can simply be transferred at the touch of a button and processed directly.
This reduces effort and thus also management costs. It is also possible to build in plausibility checks for electronic forms. This means that the data can be reviewed to ensure that it is complete and correct, eliminating the need for time-consuming queries. Efficiency is therefore improved both for the insurer and the insured.
Martin Jucker: The benefits of digital solutions were also particularly evident during the COVID-19 pandemic. At the start of the crisis period when we had to work out the new COVID-19 compensation in the first pillar, we were very thankful that the majority of our clients were already making use of the digital offering. This meant that we were able to communicate with them easily and deliver the required benefits within just a few weeks.
How exactly should companies go about comparing different pension funds?
Markus Büchi: The annual pension fund comparisons that are published in the media provide a good initial overview. After that, we recommend that companies define the key criteria and request quotes from various pension funds. The next step is to compare the quotes in detail – and it is important to allow plenty of time for this in-depth task. It is also a good idea to seek a second opinion from a specialist broker – in our opinion, the law of mandate should be taken into account, and we have noticed that an ever-increasing number of brokers are following this practice – and to examine the annual reports of the pension funds.
When is the right time to start planning for a switch of pension solutions?
Christina Vettas: As early as possible. This is because you need to take into account the notice period on the existing contract for one thing, and that is generally six months. It is also essential to factor in plenty of time to build employee acceptance and define the selection criteria, and for the request for proposal. This means that you should start planning for the switch at least one year in advance.
What are the key criteria to consider when switching pension funds?
Markus Büchi: In addition to the termination provisions in the existing contract, it is important to consider whether existing pension recipients can or must be ported over to the new pension fund. And if so, what the terms and conditions will be. With the new pension fund, it is important to check what the financial situation is and whether it is necessary to buy into the coverage ratio. Finally, the co-determination right of employees must be taken into account. That is why they should be involved in the entire process as early as possible.
How do pension funds support their clients with this process?
Martin Jucker: Firstly, it is important to form a clear picture of the needs, so that a suitable solution can be developed. Secondly, industry-specific solutions, for instance, could represent the best way to take into account the special features of individual industries, such as collective bargaining agreements, and might offer a holistic package. Finally, it is important to always offer clients transparent and trust-based advice. Social insurance is something that affects all employees very directly, so it is important that there is positive sentiment about the decision.