The small but innovative €566m Bosch hybrid group pension scheme remains the only occupational pension fund in Germany to apply changes to accounting practices introduced in 2005 by the International Financial Reporting Standards board which affect the way companies view their pensions. So claims the scheme, which adds that, despite the changes, Bosch still funds active members’ benefits and holdings to the maximum leve l the law permits.

But that’s not all. It also says it is the only company scheme in Germany that manages both the employer and employee contribution accounts in one investment structure. A structure that continues to evolve as the Bosch fund finds fresh opportunities by exploiting the scheme’s investment rules and conditions to the full.

“In March 2006 the union and management of the metal and electrical industry allowed the conversion of the current value of employers’ savings accounts into employers’ pension contributions,” the fund says. “Instead of the previous way assets were accumulated, the controlling parties in the scheme are promoting the build-up of pension provision by using the capital markets - investing,” it adds.

PLUS ONE
Under the old system, contributions to retirement savings by the company and staff were managed separately. The employer savings accounts which were kept for each employee were a mix of employer contributions and state benefit. These sat alongside the employee contribution accounts that contained contributions by the employees and various state benefits. These were supplemented by a special company contribution account known as Plus.

All this was rather confusing. Realising how inefficient the system was and how consolidating the three would offer a better deal, Bosch began shifting the assets in the employee accounts to the Plus account, with the company contribution accounts being gradually phased out and replaced by direct company pensions contributions into the Plus structure.

FLEXIBLE APPROACH
This new streamlined structure opened other doors, as well. “We saw room for special contributions. For the first time, following a strong financial performance during 2006, in addition to its regular contributions, Bosch gave a special performance-related cash injection to the Plus accounts that can be invested with the rest of the assets to help build pensions capital. The Plus company contributions account thus provides a strategic concept option where at any point henceforth, in addition to the traditional contributions by the employer, further company and other agreed payments can deposited,” the scheme explains.

Bosch says this will help win over the public debate about the advantages of having an investible “pension salary”. Moreover, it believes its Plus account structure will catch on and is an infinite improvement on the previous pay-as-you-go model. “We anticipate that this new Plus group account concept is likely to far exceed the significance of the previous individual ‘traditional’ remuneration in kind, especially in the lower-income bracket where it will significantly promote the build-up of capital-based pension provision,” says Bosch.

Contributions to the Plus account are, as with contributions into other group pension scheme accounts, based on a contribution commitment with a minimum payment. “The Plus structure allows a one-off capital investment as part of a long-term lifecycle plan,” says Bosch. “This greatly enhances the potential returns on investments.”
Its status as a hybrid scheme is determined by the combination of a minimum payment from the invested assets during special qualifying conditions and income from a life insurance-type structure that draws its income form the scheme - much like a traditional annuity converts pensions capital into income over a regular timeframe in a special  life insurance policy. The auditors have designated the Plus account as defined contribution but the pensions guarantee adds an element of defined benefit.

ALL-ROUND EXPANSION  
“The number of staff the Plus structure is available to is growing rapidly,” the scheme says. “Overall, the Bosch scheme welcomed contributions in excess of €100m in 2006 and we expect this to rise to €150m this year.”  Thanks to this rapid growth, the Bosch scheme, which was established just five years ago, should boast assets of more than €9bn by 2009.

Given this level of growth, Bosch says it can be a little more adventurous with its investments and is looking to add alternative investments to its strategy. “The plan is to add an ‘alternative investments’ master fund alongside the two existing broadly diversified ‘shares’ and ‘pensions’ master funds. This will combine a wide range of alternative investment classes such as private equity, real estate holdings, hedge funds, and commodities.”

HIGHLIGHTS AND ACHIEVEMENTS
The rapidly expanding Bosch pension scheme is making the most of changes to Germany’s pensions laws to maximise the level of benefit and pension income it can offer its 91,000 active members.

Combining elements of defined contribution and defined benefit means it can offer a guaranteed pension with minimum risk on the sponsor.

Consolidating contributions - hitherto managed in separate accounts for both employer and employee - in one account is a streamlined and effective means of ensuring all the assets set aside for pension provision and benefits can be put to work in the capital markets, which, thanks to the fund’s success in a very short space of time, will soon take in the alternative as well as the traditional.