Ahead of the game with smart pension provision

Gone are the days when an employee’s primary concern was salary when choosing their employer. According to a representative survey, conducted by Zurich in 2016, today 60 percent prefer to receive a slightly lower salary and a good pension package in return. Uncertainty about the future of pensions and the years of discussion about pension reform have led to a rethinking in Switzerland.

SMEs can choose between two different models in the pension market: those of the full insurers and the semi-autonomous foundations, including the Vita (Vita Classic) Joint Foundation, which Zurich established in 2004. Like the other three foundations established by Zurich, Vita Invest, Vita Plus and Vita Select, it is legally independent. The Vita Joint Foundation is connected to Zurich via a close partnership.
"What both models have in common is that they cover the risks of death and disability," explains Sandro Meyer, Head of Life Insurance at Zurich Switzerland. "If employees can no longer work for a longer period due to illness or accident, the fund pays out a pension." If employees die, their spouses and children receive a survivors' pension. Any benefits are financed from the risk contributions of employees and employers. The big difference between full insurers and semi-autonomous foundations lies in how they deal with the third important risk: that of investing retirement assets. The funds invest the savings contributions of companies and employees in various assets and try to achieve the highest possible return. The return has a big influence on the value of old-age pensions. If investments achieve a good return, the later monthly pension will be higher. This is often referred to as the third contributor.

Making investments creates risks, however. For example, shares or real estate can lose value. The full insurers guarantee that they will pay for any losses. In the case of semi-autonomous funds, however, the affiliated companies and their employees bear the investment risk. In this respect, semi-autonomous institutions resemble the company-owned pension funds run by many large companies for their employees. If, over a longer period of time, investment losses increase to a point where the institution can no longer cover all its obligations, semi-autonomous institutions require additional contributions from employers and their staff. Hence full insurers offer the advantage that their customers do not have to worry about the ups and downs of the investment markets. This guarantee comes at a price, however: For one thing, full insurers are more expensive than semi-autonomous insurers, and they do not pass all investment income on to policyholders. The law stipulates that they must pass on at least 90 percent of the income. In addition, there is one disadvantage that has been particularly evident in recent years: when investing, comprehensive insurers pay more attention to security than to return. They primarily invest their money in bonds that hardly yield any returns and often even have negative interest rates. The consequence for the insured is that their retirement assets are subject to weak growth. This is the reason why many companies have switched from a full insurance model to a semi-autonomous one over the last five years. Zurich was the first major insurance company to make early use semi-autonomy and is regarded as a pioneer. Today, when the industry talks about semi-autonomy, the Vita model is often mentioned.

"Semi autonomous foundations such as Vita Classic offer the advantage that they invest retirement assets with greater opportunities," says Werner Wüthrich, Managing Director of Vita Classic. "They invest more in stocks, for example." He says that this was worthwhile in the past: "Even though there were setbacks and losses in the interim, returns over a longer period of time were significantly higher than in other asset classes," explains Wüthrich. The Swiss Market Index (SMI) rose from around 2,500 points in 1995 to over 9,200 points in February 2019. As a result, policyholders' retirement assets grow more strongly and their future retirement pension is higher. The fact that the semi-autonomous institutions, in contrast to the full insurers, pass on 100 percent of the investment income to the insured also contributes to this. The disadvantage of semi-autonomous institutions is that companies and their employees may have to pay additional contributions if the fund has insufficient cover for a longer period of time. However, the rapid growth of the SMI shows that this risk is limited. Even a massive slump on the stock exchange, such as after the 2008 financial crisis, did not mean that the majority of institutions had to ask the companies and their employees to contribute more. The Vita Joint Foundation has never had to demand additional contributions due to insufficient cover. The reason: While full insurance policies are required by law to be able to meet all their obligations at all times, semi-autonomous foundations may suffer from insufficient cover for a certain period of time. If prices rise again a few months after a crash, the majority of semi-autonomous foundations can bear out such crisis with a little patience.

In addition to the risks described above, there is also a threat of company-specific risks with regard to the sector. If companies shrink over the years because they are not successful or because their industry as a whole loses value, the proportion of pensioners and active individual in a fund threatens to shift unfavorably. The more pensioners in a fund, the more cash and cash equivalents it needs to pay out the pensions. If there are not enough assets to make contributions, the cashflow may fall out of balance. Such problems are less common in large joint setups. Hundreds of companies from all kinds of industries have joined them, meaning that the diversification offers a very good risk balance among all insured. More than 21,800 companies are part of the Vita Joint Foundation, the largest of the four Vita joint foundations. With around 130,000 active policyholders and just under 3,000 pensioners, the ratio between active and retired members is very balanced and favorable. The close relationship between Vita and Zurich makes attractive contributions possible. The Vita Joint Foundation benefits from Zurich's broad distribution network and established customer service. The risks of disability and death are also covered by Zurich as a risk insurer. Vita is responsible for investing the pension assets of around CHF 14 billion. It invests the majority of its pension assets via the Zurich Investment Foundation. With around CHF 23 billion in assets under management, it is the largest non-bank investment foundation.