Responsible companies offer their employees a secure future – and here occupational pensions play a key role. How can employees find out whether their own pension fund is safe? Michel Herzig, Executive Manager of Tellco pkPRO, on security and misconceptions in occupational pensions.
How do I know if a pension fund is safe?
“Successful retirement provision over the long term depends on many factors. The biggest challenge is not to rely on individual figures provided by the pension institution, but to obtain an overall view and also to consider the future outlook. Those who look no further than last year’s coverage ratio and interest rate are apt to miss important indicators.
There are examples of pension funds with a coverage ratio of 112% or increased interest on retirement savings, but with an extremely high technical interest rate of 3.5%. If we look only at the coverage ratio or interest rate, these pension funds look attractive. A reduction in the technical interest rate to a sensible 2.00% or 1.75%, however, could even result in underfunding for these pension funds. A high coverage ratio and a high interest rate on retirement savings are therefore no guarantee of greater security. The combination of age structure, risk/return ratio, conversion rate and technical interest rate is crucial.
If you would like to see the big picture, then focus on ensuring that your pension fund offers a low technical interest rate, a low conversion rate and a safe investment strategy. This may then lead to a lower coverage ratio, perhaps also to a lower interest rate – all in the interest of security.”
What should I as an employee consider if I am aiming to achieve the best possible development in my pension fund assets?
“As an employee it is important to ensure that there is minimal redistribution within the pension fund, meaning that active members receive a similar interest rate to pension beneficiaries and that the pension fund has a positive ratio between these active members and pension beneficiaries: the more active members the better. In addition to this, a low conversion rate is preferable. This may sound paradoxical initially: a high conversion rate at the time of retirement guarantees a high pension – but a 30-year-old still has around 35 years of work to complete. And during this time, a high conversion rate means that the income earned on the pension fund assets of the active member are redistributed to the newest pension beneficiaries. Did you know that, depending on the conversion rate, many pension funds have to inject 20% of the capital needed by new pension beneficiaries on retirement from the income earned on pension fund assets? This means that these pension beneficiaries receive a fantastic farewell gift from the company’s active members, as the sums involved are huge: we are talking about five- or six-digit figures to be ‘presented’ to future pension beneficiaries on their retirement. My advice, therefore, is that the younger you are, the lower the conversion rate should be.”
What should I consider as an employer?
“The same applies for employers as for employees. In addition, it is also worthwhile focusing on a low technical interest rate. This means that the existing pension reserves are already very well endowed, and the likelihood of supplementary contributions is lower. What is more, it is surely in the employer’s interest to ensure that the time-consuming administration work is simple and effective.”
Tellco pkPRO is considered to be extremely safe. What is it that you do better than the others?
“Tellco pkPRO dares to risk an unpopular approach – it does not focus on a high coverage ratio and a high interest rate, although these key figures can make a pension fund look good at first glance. The independent collective occupational pension foundation from Central Switzerland focuses on a secure future, as it considers a long-term approach to be essential, especially in the current politically uncertain times. In this regard, Tellco pkPRO goes further down the road that is still being discussed in the political domain. When the time for implementation comes, Tellco pkPRO will already be one step ahead, and hence in a good position.
For many years now, our strategy has been based on three key aspects:
(1) Financial security thanks to a good risk/return profile and a safe investment strategy
(2) Creation of fluctuation reserves before increased interest is granted
(3) Structural security: In recent years, Tellco pkPRO
has invested in the future by cutting the technical interest rate and significantly improving the ratio between active members and pension beneficiaries. Thanks to these measures, it is now ideally equipped for the future. And Tellco pkPRO is relatively unaffected by the problem of ageing that is so common within the sector.”
Do you have any further questions about your occupational pension? Our pension experts are happy to help you