Risk sharing balanced by improved communications
Established in 1972, JTI Switzerland Pension Fund is a hybrid defined benefit/defined contribution scheme with €118m under management. One of the primary objectives of the scheme is to ensure that benefits for its members are adequate and secure. Historically, the plan has aimed to provide benefits at around the 75th percentile of the market, akin to large Swiss-based multinationals. However, benefits provision has always had to be finely balanced with ensuring an acceptable cost level to the company. Prior to 2003, as a modified cash balance plan with benefits based on the accumulation of savings credits and interest, the interest accumulation was fixed at a guaranteed 5%. Yet this was to prove problematic.
As part of a review in 2002, an asset-liability modelling study was carried out, which determined that the 5% interest guarantee, exacerbated by cumulative negative investment results, was exposing the company to unacceptable levels of risk through excessive costs. This prompted an urgent rethink in risk management. As a result, the interest formula was revised to a variable rate. This comprised a base credit equal to the LPP minimum rate plus 0.25% and a bonus rate calculated on the rate or return earned. Annuity options are provided, based on an annuity purchase from an insurance company.
The fund hopes these measures, by sharing risk more equitably between the company and its members, will alleviate the burden of cost to the company on the one hand, while still providing reasonably prospective benefits to members on the other.
The adjustment to the basis for risk sharing has meant that employees, in taking on a larger proportion of pensions risk, have had to take on a far greater degree of personal responsibility in managing their own retirement goals. In respect of this, the fund has put in place a number of measures to ensure that employees are equipped with the tools that will help them to manage effectively these retirement aims.
In 2004, the fund introduced two key initiatives for this purpose and is in the process of implementing these additional programmes. Firstly, an employer-financed AVS (social security) bridge for up to five years before national retirement age. This programme is skewed in favour of modestly paid staff and makes early retirement a realistic option. Secondly, a wholly voluntary employee-financed supplemental savings plan is being set up, which will allow employees to pre-finance all or part of the pension gap resulting from early retirement. Furthermore, this programme will also allow employees to increase contributions in the event of poor investment markets.
Highlights and achievements
With external input from the corporate compensation and benefits group and the scheme’s actuary, Pendia Associates, the management of risk and modernisation have been integral to JTI Switzerland Pension Fund’s recent strategy. It has not faltered from taking tough decisions.
Acknowledging that through a redistribution of the burden of risk, it has increased the proportion of risk to its members, the present implementation of two retirement programmes reflects its commitment to ensuring that meaningful benefits to its employees are maintained. Furthermore, alongside the scheme’s new retirement initiatives, a more interactive communication strategy has been put in place, which will include content on personal financial and retirement planning.
The fund is highly confident that these initiatives will maintain the critical balance between providing adequate benefits provision for its employees without exposing the company to an unacceptable level of cost.