While 2017 was a good year for pension funds, trends show that pension outcomes are falling: Investing the same amount of money today in a pension plan is likely to lead to a lower outcome at retirement than in the past. At the same time, employer risk is increasing as interest rates remain low. Some employers see 1e pension plans as part of the solution. What are the latest insights on this?
What are 1e plans?
1e plans allow individual employees to choose how their pension savings are invested from the range of strategies made available by the plan. 1e plans can be set up to cover earnings above CHF126’900 either in addition to or partially replacing existing pension plans. Changes in law in 2017 mean that, depending on the design, these plans may be accounted for as defined contribution under IFRS and US GAAP.
Recent months have seen an increase in activity in the 1e market. Many companies are in the process of or considering implementing such a plan. 1e plans fit corporate objectives to reduce employer pension risk, increase outcomes and choice for employees.
What do you need to decide? 5 key decisions you’ll need to make
1e plans can have a similar design to your current plan, but there are some special considerations and questions you will need to answer:
- Benefit design – should you make changes to benefits during the change? Making no change supports communication messages and continuity. Some changes may be needed to manage accounting treatment. It could also be a good moment to give employees options to pay more to boost their outcomes.
- Structure – should you operate your own fund or move to a full-service third-party provider? Own funds bring control and more choice in set up. Full-service providers have experience and can simplify the transition.
- Investment strategies – how many strategies should you offer from the maximum 10? More strategies increases employee choice. Fewer strategies are easier to manage and simpler to communicate.
- Eligibility – who’s in and who’s not? There may be obvious criteria for deciding membership of the plan such as closeness to retirement or job grade. You may want to limit the number joining to simplify communications. But more members maximizes the benefits of such plans.
- Past service or just future – do you intend to transfer past rights or just start the plan for the future? As with eligibility, transferring past rights in some form leads to the biggest impact of changing the plan. Starting for the future lowers the impact but is easier to communicate.
3 challenges you will face and how to address them
Recent experience has shown it is critical to get the following challenges right:
- Employee relations – pensions can be an emotional topic. Effective communication ensures that the benefits of the new plan are understood. A 1e plan may mean that the option to take a pension at retirement is lost, which may be seen as negative. On the other hand, investment options and flexibility are increased and there is a higher chance of a better outcome due to higher potential returns (at a cost of more risk).
- Aligning stakeholders –multiple stakeholders need to be managed not only within management but also pension plan committees and boards, and external providers. You’ll need to ensure good alignment of all internal stakeholders from executive level to line management, finance to HR, global to local. Everyone will have an opinion so strong sponsorship from the top is needed.
- Impact on pension fund – changing to 1e will have an impact on what’s left behind. As a minimum your current pension fund will have less regular income to manage the fund. At most, a sizeable portion of assets (and obligations) may leave the fund, possibly with a share of any local surplus. This can raise significant questions and trigger the fund to look again at the reserves they hold.
What next? Getting it right
Planning is, as always, critical to success. Plans needs to be supported by both analysis and engagement with important stakeholders throughout the organisation. This takes time. If you are thinking about changing your plan for the start of 2019, the advice is clear: get started now!