Smooth sailing on the voyage from DB to DC
The world-renowned financial information and reporting company Reuters has been steadily shifting its pensions arrangements globally to a clear defined contribution structure. It feels this fits in with its young workforce, which has an average age of just 35. Moving away from defined benefit is also beneficial for the sponsor, as it relieves risk. "Designing and communicating correctly a DC-style benefit can help to attract and retain the right employee base for Reuters," the scheme says.
OVERCOMING INTERNATIONAL OBSTACLES
But operating internationally means local schemes are subject to local regulations and Switzerland is a prime example where DC usually retains elements of DB and firms often find themselves running hybrid DB/DC arrangements. "True DC in Switzerland is still not possible, but careful design has got us as close as we can, minimising the variance and volatility of the difference between the annual IFRS pension charge and company contributions," says Reuters.
To give the scheme its DC feel, Reuters says risks have been removed from the plan wherever possible through external insurance, and are minimised as far as possible within the legal framework of the scheme. "Reuters readily accepted the need for a higher contribution rate under DC, due to the removal of subsidies from younger to older employees, in order to target a similar retirement benefit. Ironically, the introduction of IFRS assisted us with this change, as it made the true long-term cost of the DB scheme clear for all to see," the firm explains.
COMMUNICATION IS KEY
Any change to a pension scheme's structure requires a carefully-planned communications policy, especially where a firm is moving from DB to DC, as the differences need to be clearly explained and members need to understand their role in building their pensions capital. "An exceptional communications campaign helped produce an all round win for us," says Reuters. "Some 50% of the older members, who were given the option of not changing their existing pension arrangement, decided to switch to the new plan."
Reuters says its decision to change its pensions structure was vindicated by employee reaction to the time, money and thought that the company had put into the re-designing and communicating of their benefit arrangements - almost entirely positive. "The level of understanding and general awareness the employees displayed about the value of the benefits on offer, both DB or DC, increased enormously."
Switching from DB to DC, or as in the case of Switzerland, achieving the right DB/DC balance that removes as much of the DB risk as possible and opens the investment spectrum to members, implies some major changes to the overall structure of a scheme.
In Reuters' case in Switzerland, some of the more basic and fundamental changes include:
A choice of three employee contribution rates. "Increased flexibility for employees to integrate their pension with their other financial decisions is considered one of the major positive aspects of DC," the firm adds.
Pensions to be sold off to insurance company partners at retirement who will provide an annuity. "The company contribution rate was increased to above the market norm to help balance the impact of this," Reuters points out.
The Foundation Board implemented a clear policy on the rate of return on DC balances, based on real market factors and distanced itself from any reference to the Swiss BVG/LPP pensions guarantees.
Investments are to remain under the direct self-administered control of the Foundation Board. "We do however expect the DC investment policy to deviate from that of the DB plan in the future, as the membership profile of the two schemes moves apart," the scheme says.
A 10% increase to benefits was made to members' individual balances when they transferred to the new plan, which was funded through a release of reserves.
Minimising BVG/LPP impact on scheme design. "The total minimum benefit under BVG/LPP has to be calculated," says Reuters. "What is different in our restructure is that the separate parts of the calculation - contribution rates, guaranteed returns and conversion rates - which apply to the BVG/LPP benefits were not allowed to influence the design, as they have traditionally done in Switzerland," it adds.
An extensive and inclusive communication campaign was carried out in three languages, inviting members to raise any questions and air concerns.
"Communications were also delivered electronically to all employees currently at work, with paper copies going to those on long-term, sick or maternity leave," Reuters explains. "We also developed a dedicated website for the pensions arrangement. Employees made their final choices about contributions and type of plan online, with e-mail and hard-copy confirmations sent out afterwards."
With a careful balance of culture and practice and corporate principles, Reuters believes it has implemented a unique DC solution in Switzerland. DB has been maintained ‘as is' for those wish to remain in the closed DB plan, but a new hybrid section to the plan is now up and running.
"This section protects employees from the subsidies and unfairness of DB, particularly for early leavers in Switzerland; but is sufficiently generous to ensure that it will produce a market competitive benefit for anyone retiring after building a long career at Reuters," the scheme says.
HIGHLIGHTS AND ACHIEVEMENTS
Moving from DB to DC is a major upheaval for any scheme. Regulations in some countries make it easier to switch than others. Switzerland has a tight pensions regime that effectively does not allow pure DC as many understand it.
But Swiss schemes and their sponsors are faced with the same problems as schemes elsewhere and are looking for viable alternatives that offer generous benefits with vastly reduced risk to the sponsor.
Reuters has found the perfect way round this problem. By protecting its new DC section from the accounting charges and the pensions guarantee under Swiss law, it has removed much of the inherent risk a DB scheme poses, allowing the company to concentrate on boosting contributions and introducing flexible choices and practices for its members in Switzerland.