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Split model balances guarantee with growth

The fund was initiated jointly by the association of the chemical industry employers and the union of the chemical industry employees in Germany. Both associations still support the fund by promoting it among their members and both organisations send members to the supervisory board of Chemie Pensionsfonds. Financially, however, the Chemie Pensionsfonds is a 100% subsidiary of HypoVereinsbank.
The fund is currently staffed by 23 permanent employees and four members of the management, most of whom have a considerable track record in their area of competence and in the pension industry.
Realising that attracting highly qualified employees is only the first step in building the company to maintain its competitiveness in the pension industry, the sponsor established the clear goal of investing in the education of its employees. Therefore the fund is undertaking the sponsorship of its employees in various programmes ranging from tailored seminars to general courses regarding current developments in the pension industry.
To this end, employees are carrying out projects and undertaking responsibility outside of their own departments to give them a broader view of the operational processes of the company.
The objective of the fund is to provide pension schemes to the chemical industry using the new instrument of the Pensionsfond (pension fund) established in Germany in 2002. Both the chemical industry employers and the union of chemical industry workers are actively working on promoting the scheme. Given the two-fold character of pension schemes, this has proven to be a very successful approach: the employers association promotes the scheme among the companies, while the union actively communicates the scheme’s advantages among employees. The main pensions enhancement currently in progress within the plan is the introduction of a completely new defined benefit (DB) scheme. This scheme will address the needs of companies that want to outsource their current in-house pension plans. The Chemie Pensionsfonds plan will be among the first pension funds offering such a scheme.
Furthermore, the fund is in the process of introducing additional investment features for its existing defined contribution (DC) plan.
The Chemie Pensionsfonds was set up as a co-operation between the association of the chemical industry employers, the union of the chemical industry workers and the HVB Group to supply DC plans to the chemical industry, which in Germany were only allowed as of 2002. The main objective for the employers was to have a scheme that reduced their risk compared to DB plans. At the same time the union wanted a scheme that provided a financially attractive offering to employees.
Setting up a defined contribution scheme in Germany involves a specific challenge imposed by German legislation. Even for defined contribution schemes an employer has to give a guarantee that at start of the retirement at least the amount of investment contributions made into the scheme will be available to fund the old-age annuity. Understandably, the employers wanted this guarantee to be taken over by the pension fund to avoid being forced to cater for it themselves. On the other hand, any guarantee in the investment area has its price, therefore reducing the expected yield of the total investment.
Hence the Chemie Pensionsfonds had to build a scheme where this guarantee was covered, while ensuring that, at the same time, the expected yield on the total investment remained at an attractive level.
As there were no examples available in the marketplace, the Chemie Pensionsfonds had to start from scratch. The model used is that of a split investment: one part of the investment focuses on the guarantee, the other part is focused on attractive, sustainable growth in the medium to long term.
To provide the guarantee, contributions are discounted up to retirement using a guaranteed interest rate of 3.25% (the maximum rate of guarantee currently allowed for German pension and life assurance companies) to calculate the part of the contribution to be invested into this first fund. The discounting is calculated exactly to the day of the contribution, which was uncommon in the German marketplace before. The remainder is then put into the second investment pot.
This mix of a safety-oriented and a growth-oriented investment was new to the German pensions market. The Chemie Pensionsfonds was the very first pension fund offering such an attractive defined contribution plan in Germany. A number of pension funds have since followed suit, but the Chemie Pensionsfonds has been able to use its competitive edge to become the biggest open pension fund (ie, open to other employers) in Germany.
According to the statistics of the GDV (the association of German insurance and pension companies) as of the end of June 2003, the Chemie Pensionsfonds was able to gain about one third of the individual members of all open pension funds and even 50% of all regular contributions paid into open pension funds. This makes the defined contribution offering of the Chemie Pensionsfonds a true success story that has developed much more successfully than it was hoped for at its inception just one year ago.

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