The Sfr6.7bn (e4.5bn) Nestlé corporate pension scheme, which has 6,700 active members and 4,000 retired, is in fact two schemes: a basic DC scheme, to which both employee and employer contribute a fixed amount, and a complementary DB plan, to which only the employer contributes.
“We have stayed with DC as a base plan because the law is structured in such a manner that a DC plan can probably fit it better,” says Jean-Pierre Steiner, Nestlé’s corporate pension and insurance director.
“But on the other hand the company wanted to offer more security to its employees which the DC plan does not because the investment risk is then borne by the employees entirely.” The DB plan comes into play if DC plan benefit fails to reach a certain amount in percentage of the final pay.
“Such a construction provides a larger flexibility inasmuch as the company fund gives no guarantee, no rights to the fund whatsoever to the active staff. It intervenes only on retirement and only if the conditions are fulfilled – if the DC benefits is not sufficient to cover what is considered the appropriate replacement income. And no one knows, at any point in time prior to retirement, whether his final benefit will be above or below the target benefit Furthermore this construction has the advantage of avoiding some taxes that are due in Switzerland. And there is by definition no portability in the company fund.”
There is no investment choice in the DC scheme. “So far in Switzerland, even though we have raised the question a number of times whether to offer investment choice to the beneficiary, people were not so interested.
“Obviously now with the equity markets going down, there is a even less of an interest and the guaranteed benefit of a DB plan looks very appealing. But it may come. Obviously a DC plan is more appropriate to offer this type of investment choice.”
The Nestlé Group recently decided that the Swiss schemes should provide a model for the other corporate plans in the group, says Steiner. “It was clearly confirmed that, group-wide, the ideal pensions structure should be the one we have in Switzerland – the combination of basic DC and complementary DB. And if it were not possible to do so than it would be better to have a DB than DC plan.”
However, for accounting purposes, the Swiss Nestlé combined plans should be viewed essentially as a DC plan. Nestlé is reviewing with its auditors the status of its fund under international accounting rules. The auditors maintain it is a DB scheme, and that therefore any surplus or deficit (over the so-called corridor), representing an economic value to the company, should be included in the company’s balance sheet.
Steiner and his colleagues disagree. “Within the Swiss legal framework, as long as the company has paid a constant contribution into the fund, never intervening over the last 10 years whether there was a surplus or a deficit (the company has never taken a contributions holiday, for instance, despite the large accumulated surpluses), then we can make the case that the pension fund bears the risk itself and therefore the company should not be liable for any future deficit, nor of course benefit from any surplus.
“In other words, If the contributions from employers are constant as a percentage of pay and then the fund itself bears the risk then it should be treated in Switzerland as a pure DC.”