Innovation is watchword for scheme that makes most of new legislation
Robert Bosch, a leading German industrial company with 250,000 employees worldwide, of whom 110,000 are in Germany, established its pension scheme, Bosch Pensionsfonds (BPF), in 2002, making full use of legislation in Germany encouraging the creation of funded pension schemes to replace the traditional but somewhat creaking pay-as-you-go and Pensionskassen systems. So swift was Bosch to react to react to the change in the law that it was the first Pensionsfonds to be offered by a German industrial company.
From the outset, Bosch has strongly believed in the innovative qualities of this newly established pension savings vehicle in Germany. Between 2002 and 2005, BPF managed the firm's defined contribution plan which had a membership of 20,000 and had accumulated assets under management of more than €440m.
Innovation is a big word at Bosch, as the firm moved swiftly again to capitalise on additional pensions legislation in 2005 which brought German schemes in line with IFRS international accounting standards, thus improving the type of provision it could offer. Taking full advantage of this, the Bosch scheme was restructured as a hybrid defined benefit and defined contribution arrangement. This was another first, as the new scheme, formally known as the Bosch Vorsorge Plan, was the first of its kind where a company in Germany made contributions for each of the scheme's members.
Bosch says it expects the annual employer contributions to total somewhere between €75m and €80m, with employees collectively contributing between €15m and €20m. Though technically a hybrid, as it contains elements associated with a DB scheme, the structure in terms of end provision of the arrangement resembles a defined contribution plan. "The Bosch Vorsorge Plan simplified the corporate pension system for both employer and employee tremendously, as there is now only one common plan," the scheme explains.
Bosch says the BPF sits at the heart of the firm's pensions arrangements and now has almost 90,000 active members. "Employees now benefit from the efficiency and flexibility of an investment policy that, under German law, only a pension fund can offer," Bosch says.
BPF invests in a diversified manner across traditional and non-traditional asset classes using master funds and a Master KAG, specialist fund management companies pension funds outsource their assets to.
Bosch used a traditional beauty parade to select asset managers for mandates within the master funds. The scheme's asset allocation strategy follows a life-cycle approach and is based upon asset/liability studies. This strategy means employees up to the age of 55 are deemed to have a more growth-oriented investment requirement and so around 50% of their assets are allocated to equities.
Over the age of 55, however, the strategy changes. As is more frequently happening in defined contribution schemes, a capital preservation approach takes over and the equity allocation is reduced to around 20%. This is not done in one swoop, as the transition from the growth to preservation strategy is managed by gradually decreasing the equity allocation.
Risk always figures prominently in pension fund's management, and in a defined contribution arrangement, the employee bears the lion's share. To ensure it keeps risk to a minimum for them, Bosch has developed a risk management system which is supervised by an independent investment controller. "This enables the scheme to react immediately to changes in capital markets," Bosch explains.
Thanks to this comprehensive and organised approach, Bosch says it has been able to achieve high returns of more than 38% for 2003, 2004 and 2005. Under the terms of the new pensions law this year, Bosch said it was able to transfer its existing pensions liabilities worth some €320m covering nearly 38,000 retirees into the new arrangement. "Again, this was a first for a German company," Bosch boasts. "We may well transfer yet more liabilities from the old system," it adds.
Bosch says the BPF is a highly professional Pensionsfonds employing the best service providers in their relevant fields in a modular set-up. As a corporate pension fund and operating on a non-profit basis, Bosch claims it is highly cost efficient and employees benefit from very low costs. Administration for active employees as well as for retirees is now completely outsourced and operated by a specialised service provider. Plan members also have access to their accounts via both internet and intranet.
With €444m already under management Bosch says it has by far the largest corporate Pensionsfonds in Germany and its structure is a pioneer among pension funds in Germany. Bosch adds others are watching it closely. "Being at the forefront of German corporate benefits, we now see growing demand from other large German employers who want to know more about what we are doing. We believe some will follow our example in the near future, and we are ready for the challenge of extending it into a pan-European fund" the firm says.