What is a standard company pension scheme product?

My blog post is based on the following definition: a standard company pension scheme product is an investment option in company pension schemes that is suitable for the majority of all employees and is secured by state requirements and supervision.

What are the benefits?

Employees are offered an opportunity to build up a supplementary company pension that they can assume is qualified for selection. This makes it easier for employees who are undecided or overwhelmed to make a decision. They can trust that the standard product meets the basic requirements for saving sensibly in their retirement. In addition, they can also have a personal consultation to make adjustments based on their needs, if required.

Employers have the opportunity to reduce expenses by providing their employees with the standard product and not having to continue dealing with the product and provider selection process. This reduces the administrative effort and can be especially helpful in small companies. Plus, collective administration creates the potential to increase efficiency through uniform administration tools and standard processes, both for employers and the provider of the standard product itself.

Economies of scale in the system make it possible to reduce relative costs and thus open up low-cost return opportunities. As a result, sales and marketing costs are less important and the return can be increased without additional risk, making more capital available in retirement.

What criteria should a standard product fulfil?

As the name suggests, the standard product should be accessible and suitable for as wide a spectrum of people as possible. At the same time, a standard solution must be easily understandable to minimise the need for explanation and to increase confidence in the product.

Transparency is an important factor here and includes, for example, the clear disclosure of costs and included assets. State assets should be strictly separated as a fundamental pillar to strengthen the trust of citizens and thus protect it from suffering the effects of short-term decisions.

A premium guarantee should be avoided, as this would lead to severe restrictions in the investment due to the constantly low interest rates, resulting in a lack of profitability. Relative security could be increased by diversifying the assets on a major global scale and assigning them special fund status. In addition, gradually adjusting the risk profile ensures that the stability of the pension capital increases before the start of the pension and during retirement.

Being able to transfer the saved retirement assets to other pension scheme products creates additional flexibility.

New Zealand as a positive example

New Zealand is a good example of the introduction of a standard product. Here, reputable financial institutions, such as banks and insurance companies, are responsible for managing the contributions. These institutions develop products in accordance with regulatory requirements and are supervised by the relevant authority. A call for tenders is made every seven years to identify the most cost-effective provider to assume the management of the product. This competition creates pressure to innovate and prevents a monopoly of pension schemes from developing with the state itself.

A state portal enables employees to easily compare approved products in terms of relevant key figures such as returns and costs.

The issue of sustainability

Here, a standard product can be a pioneer and make investments that are oriented towards ESG criteria (E=Environment, S=Social, G=Governance) or indices, for example. This not only benefits the planet, but also those who will draw a company pension at a later time thanks to the additional returns This is for a variety of reasons, including the fact that environmental risks are minimised and ESG companies correlate with a high general quality – in terms of balance sheets, products and customers, for example.

The market power and signal strength of such a large investment vehicle indirectly encourages companies and players on the capital market to adopt a more environmentally friendly, socially responsible and positive approach to corporate governance. This is because the capital market finances their activities and they have an interest in doing so with attractive rates, if possible, in the form of debt capital (shares) and equity capital (bonds).

Various consumer surveys underline the importance of sustainability in pension schemes. Large numbers of the employees surveyed will choose an environmentally friendly company pension scheme if they have the option and this is communicated accordingly by their employer.

Conclusion

A standard product in company pension schemes can help to secure the standard of living of today’s employees when they retire without creating a serious administrative burden for employers. Competition that encourages innovation allows a solid investment opportunity to be offered with the help of automated administration. This builds on the expertise of experienced financial institutions and uses economies of scale.

At the same time, a contribution to positive development can be made through targeted investment in the capital market, thus improving the future in financial terms as well as in general.

If you would like to learn more about exciting topics from the world of adesso, then check out our latest blog posts. You can find more interesting articles on the topic of company pension schemes here.

Picture Frederik Julius  Szmania

Author Frederik Julius Szmania

Frederik Julius Szmania is an Associate Consultant in the bAV Services team at adesso. He gained industry knowledge of the financial services and insurance sector in 2017 and has been working on occupational pension schemes in Germany since writing his thesis.

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