Optimising your vested benefits

Given the huge sums of money invested in occupational pension plans, and the lengthy time horizons often involved, minor discrepancies in the average annual management performance can make all the difference when you retire. For instance, an extra 1.5% in the annual management performance for a given asset works out at an additional 45% in performance over 25 years, taking account of compound interest.

Switzerland's three-pillar system leaves beneficiaries with little room for manoeuvre in choosing an asset manager, except for their personal pension provision (known as Pillar 3A or 3B) and, in certain specific cases, their occupational pension plan (BVG/LPP or second pillar).

All too often, company management attaches too little importance to the choice of asset manager for their pension plan, a decision that ultimately determines the standard of living their employees can expect when they retire. Sometimes it’s the beneficiaries themselves who have to decide, when they choose a vested benefits institution. As masters of – sometimes a huge chunk of – their pension provision, they can select an alternative that best suits their lifestyle needs and expectations.

Remember that the vested benefits are the assets an insured person is eligible to receive upon leaving a pension plan before the occurrence of an insured event, such as retirement, death or disability. There are several instances, however, where beneficiaries have to invest their vested benefits with an approved institution, which they are free to choose.

For example, if you change jobs, decide to set up your own company, take a career break – whether voluntary or not – or if you divorce, you have to make a decision that affects part or all of your vested benefits. According to the Ordinance on Vested Benefits, with which you must comply, you have one of two options: either you open a vested benefits account with a vested benefits institution or you take out a vested benefits policy with an insurance company or a public-law insurance institution.

With an alternative form of the vested benefits account, a securities account, you can take full advantage of the asset management skills available at a particular vested benefits institution. In this case, the performance generated is passed on in full to the account holder; with a company pension plan, on the other hand, any profits above and beyond the minimum interest rate for occupational pension schemes (currently 2.75%) are not necessarily paid out to the insured. In fact, the pension scheme is free to keep the surplus performance in its reserves, to help offset results in leaner years, for example. What’s more, the pension scheme does not even have to reimburse any performance above the statutory minimum.

This is an important aspect of the investment yield as, obviously, it directly affects the final amount to which the beneficiary is entitled. For example, the chart looks at the growth of two Pictet LPP 2005 indexes over 10 years, one with 25% equities and one with 40% equities, and compares these with the historical return of the statutory minimum under the BVG/LPP.

Several criteria should be taken into account when choosing a vested benefits institution. The key factors include its level of expertise in asset management and its transparency in communicating investment information.

The fact remains, nonetheless, that institutions authorised to manage vested benefits could do with more freedom in their asset allocation decisions. The Federal Social Insurance Office (FSIO), which seeks to contain the management of vested benefits within the legal framework, may provide the impetus needed to loosen the current regulations.

One idea, for instance, would be to grant vested benefits foundations – like occupational pension plans – permission to depart from the investment constraints defined in the OPP2 (Ordinance of 18 April 1984 on Occupational Old-Age, Survivors’ and Disability Pensions) in accordance with Article 59 of that ordinance. They could then make full use of the many advantages offered by some of the newer asset management techniques, such as alternative asset management and absolute return vehicles. And it would give vested benefits foundations an additional opportunity to optimise the risk-adjusted performance they generate for their clients.