Pension fund – full insurance or semi-autonomous solution

When it comes to their employees’ financial future and occupational provisions, employers and pension fund committees have an important decision to make. Which pension fund is the right choice for financing the future pensions of employees?

If the company does not have its own pension fund, it can join a collective foundation. In this case, companies can choose between two models: full insurance and semi-autonomy. We explain the advantages and disadvantages of the two pension solutions.

What are the main differences between full insurance and the semi-autonomous solution?

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Full insurance

Advantages

Full insurance guarantees 100% security for the retirement savings and the interest on them. A shortfall is not possible, which means that the money saved is always available in full and is always sufficient to cover all payments.

Employers and insured persons bear no financial risk. They do not have to bear any restructuring costs, meaning they do not have to make any additional payments, not even if the capital markets weaken or the stock markets collapse. The insurance company assumes this liability in full.

Disadvantages

With full insurance, the money is invested very carefully. Legal requirements stipulate that only a very small proportion may be invested in equities (less than 5%).

This provides a high level of security, but has the disadvantage that returns are usually lower. The interest on retirement savings may also be lower accordingly. If you want maximum security, you may miss out on potential returns.

Semi-autonomous solution

Advantages

With a semi-autonomous solution, companies and employees have more control over how their pension assets are invested. Larger investments can be made in higher-yield investments.

If things go well on the financial markets, insured persons also benefit – for example through higher interest on their retirement savings.

Disadvantages

Companies and employees bear part of the investment risk themselves. This means that there is no guarantee as to how high the interest will be. In bad times, it can be lower. In rare cases, restructuring measures may also be necessary, such as additional salary deductions. While this is possible, it only happens in exceptional situations.

As a rule, a company that does not have its own pension fund can choose between full insurance or a semi-autonomous pension solution. The key criterion here is the balance between security and return.

What would suit my company better?

There is generally no “right” pension fund. With both models, employees save for their retirement and the risks of death and disability are insured. Employers and pension fund committees must weigh up their decision on the basis of their company’s profile, risk appetite and risk capacity. As a rule, SMEs have different security requirements to larger companies.

We recommend a consultation in order to analyse the relationship between security and return and to find a solution that suits the company.