Life-cycle concept evens out the ups and downs
In the context of the ever-changing German social and labour laws and pensions framework, the Hamburg-based Airbus Deutschland’s new working time pensions accounts scheme is based on the fundamental company principle, ‘Airbus Invest for Life’, and seeks effectively to fill the gap that will be left once the state-financed schemes for early retirement have been abolished.
Implemented in March 2004, the new working time account can be described as a defined contribution scheme, Airbus says, and is an innovative personnel management system that is designed to cope with the demands of the cyclical nature of the aircraft production industry. In essence, this means in times of market upturns that see a need to increase aircraft production, a certain amount of the extra work will be taken on by existing employees in the form of overtime. However, any money earned during these periods of overtime will not be paid out as part of regular salary but transferred into individual working time accounts and invested according to the ‘Airbus Invest for Life’ concept. At the end of an employee’s working life, the accrued capital including interest will be used for early retirement with full compensation.
Airbus Deutschland says the investment strategy for the new system is equally innovative and is based on a life-cycle concept that combines active investment in global equities and fixed income with a low-risk portfolio to protect the capital value. The concept is based on eight age groups with the investments in equities gradually decreasing whilst those in fixed income instruments increases as employees move into a different age bracket and near retirement. This is managed by placing assets in either a value protected or money market fund carrying minor investment risk and is designed to protect employees’ assets and enhance value, Airbus explains.
Each employee’s portfolio will be rebalanced on a yearly basis to compensate for changes in market conditions and allow for the changes in asset allocation as a result of the life-cycle allocation concept.
The value-protected fund is actively managed according to the continuous portfolio protection insurance (CPPI) concept with a price floor of 90% and maximum equity ratio of 25%. There is also a balanced fund with tactical asset allocation (TAA) and minimum (global) equity investment ratio of 50%. Airbus also intends establishing a pure equity fund for employees up to the age of 40 to limit the active TAA to 20% of the capital invested.
Airbus says the investment strategy is designed to maximise the expected returns on the date an employee retires and as such carries a capital guarantee covering the nominal value of contributions at retirement. The guarantee also covers early payout in exceptional cases. Airbus used the Monte Carlo model simulations for expected returns based on a confidence level of 99.5%. It says the asset allocation and investment strategies had to be structured such that the aggregated shortfall risk of the capital guarantee was minimised at an acceptable level for the employer whilst ensuring adequate returns on capital invested for the employee at retirement.
Airbus, as legal owner of the funds, will hold the aggregated shares of all employees in the four investment funds, including the money market fund, though the database of the administration of individual capital accounts is outsourced. Airbus says holding the shares internally reduces the complexity of administration as well as transaction costs. Furthermore, this set-up means only the aggregated changes in the number of shares in each of the four funds held by Airbus have to be implemented.
The funds are incorporated into the legal framework of a contractual trust arrangement in order to provide insolvency protection for employees. This also ensures the funds meet with IFRS requirements to qualify as pensions assets that can be treated as off-balance sheet items.
Airbus says high-quality member communication is paramount to ensure employees appreciate and accept the new arrangements. As such, it embarked on a road-show that included large-scale member meetings at which the investment concept and scheme in general were fully explained. Airbus says the success of its communications policy is highlighted by the fact that 4,000 out of an eligible 15,000 members have already signed up and the scheme has already attracted funding worth €10m.
Highlights and achievements
With the creation of its new working time accounts scheme, Airbus Deutschland not only takes full advantage of the investment potential offered by the new pensions laws in Germany but also deals with the problem of the ups and downs inherent in its industry.
Its lifecycle strategy and carefully planned investment policy covering the strategic asset allocation of the three premium reserve funds neatly bridge the gap between the old-style insurance fund and new system. Offering a capital guarantee alongside the gradual shift out of the equity markets as employees near retirement ensures Airbus will probably never find itself in a position where it cannot meet its pensions obligations.
The clever use of overtime as additional pensions reserve is innovative and shows its communications policy has been effective in encouraging its employees to save more and voluntarily.