How can I tell if a pension fund is healthy and stable?

By choosing the right pension fund, you optimize your costs and boost your attractiveness as an employer. But how can you tell if a pension fund is solid and stable? Looking from the outside in, it’s often difficult to evaluate a fund’s performance. We have compiled a list of key questions and answers for you.

Basic questions and terms

How can I tell if a pension fund is solid and stable?

To assess a pension fund’s stability, it’s a good idea to take a look at the foundation’s annual report, which provides a lot of information about its finances and structure.

From a financial perspective, the funding ratio is also a good source of information: the higher the funding ratio, the more solid the fund is likely to be in terms of its financial risk capacity. 

As to the structure, a key indicator for pension plans is the ratio between active insureds and pensioners. A lower percentage of pensioners implies that the plan has a solid structure. Aside from the ratio of active insureds to pensioners, the distribution of mandatory (BVG/OPA) retirement assets to voluntary retirement assets is also important. 

More in-depth information on how to evaluate whether a pension fund exhibits healthy performance can be found in the Key Figures and Performance section.

Are there legal requirements that mandate a minimum amount of stability?

The applicable legal requirements for pension funds can be found in the BVG/OPA (currently not available in english) and in the related ordinances. The BVG/OPA regulations take precedence over the provisions issued by the occupational benefits institution.

Where does the pension fund money go?

The contributions stipulated in the regulations and paid in by employees flow into the pension fund assets (asset side of the balance sheet). This also applies to one-time contributions, such as vested benefits. These regulatory contributions are divided into savings and risk contributions:

• Savings contributions increase the liabilities side of the retirement assets of active insureds. If an insured leaves the pension fund, their retirement assets will be transferred to the new pension fund in the form of vested benefits. If an insured retires, their retirement savings will be transferred to the actuarial reserves for retirement pensions that are currently being paid out. 
• Risk contributions finance benefits for the risks of death and disability. If the fund is an autonomous pension fund, they are held as reserves by the foundation. Semi-autonomous pension funds use them to finance risk premiums for the relevant reinsurance.

The contributions that are paid in are invested according to the foundation’s investment regulations. The pension fund may employ both internal and external asset managers. The foundation board is responsible for oversight.

Key Figures and Performance

What are the most important criteria and figures for evaluating a pension fund solution?

Make sure to evaluate and interpret the figures by taking the long view. As we mentioned before, the funding ratio is one of the most informative indicators in assessing a pension fund.

• If the funding ratio of the pension fund is less than 100%, then it is underfunded. The main point here is knowing whether this is just a temporary situation due to a slump in the financial markets or whether this instability has persisted for some time. 
• On the other hand, considerable overfunding (a higher funding ratio) is a sign that instills confidence and indicates solid financial management.
• You can find more information about the funding ratio in our blog.

If a large number of companies, respectively insureds, have joined the pension fund, this too is an indication of stability. 

A further indicator is the mid to long-term investment performance of a pension fund, or to be more precise, the investment returns.

• The returns tell you the amount of earnings that were generated by the selected investment strategy using the chosen asset management.
• But it is not a good idea to judge based solely on returns. A much better indicator is how the returns stack up against the chosen benchmark and how the foundation invests its returns.

The interest earned on retirement assets is based on investment performance.

• The last 3 to 5 years provide a good picture of this –they’re also a good way to check performance.

Other parameters such as the technical interest rate and the amount of fluctuation reserves are useful in assessing a pension fund. And regulatory provisions can provide additional information on the flexibility of the insurance benefits as well as the conversion rate.

What does the performance of my pension fund tell me?

The annual return tells you whether the invested retirement assets generated a return and, if so, the amount of the return:

• If the annual return is positive, then the pension fund assets have increased. This refers to the target investment income, which serves as the interest on retirement assets and is used to build reserves.
• If the annual return is negative, this means assets have decreased.

Saving and growing retirement assets are long-term goals that are generally planned for a period of forty years or even longer. You should also check the returns over a period of several years when you asses a pension fund. Checking the average performance over five or ten years is a useful indicator of the stability of the pension fund.

How do I compare the performance of different pension funds?

It is very difficult to make a comparison because of the various pension plans and different investment strategies. The best thing to do is to ask a retirement advisor for advice.

What influences performance?

The biggest influencer is the investment strategy that is set out in the investment regulations. The foundation board must evaluate the investment-related risks and the technical risks when determining the investment strategy. To do this, it must create an overview of the liquidity needed, the risk capacity of the pension fund and the minimum amount of income that needs to be generated from the assets. This is the basis that serves to define the investment mix. The percentages of retirement assets that are invested in shares, bonds, mortgages, loans, real estate or alternative investments are decided at this time. 

What means are available to me as a company that I can use to inform myself about the investment performance of my pension fund?

The pension fund’s board of trustees is responsible for financial reporting. It provides an annual report (or annual financial statements) to present the actual financial situation of the occupational benefit institution. The report also contains the actual implementation of the investment strategy set out in the investment regulations. Generally, the key figures are also available for viewing in other places, such as on the foundation’s website.

Duty to provide information and auditing

Is the pension fund required to provide information to its members?

Absolutely. The governing bodies of foundations must provide comprehensive information to affiliated pension funds and insureds. This includes information about the organization, activities and financial situation (net assets as part of this) of the foundation. The occupational benefits institution must also observe the fundamental rules of transparency. The basic rules for this are contained in the BVG/OPA Art. 85b BVG/OPA.

The beneficiaries are entitled to receive ad-hoc updates. In this context, ad-hoc means that the occupational benefits institution must inform the insureds about their benefits when they join the pension fund. They are also provided a copy of the pension fund regulations. The occupational benefits institution is also required to proactively inform the insured about regulatory withdrawal benefits and about the BVG/OPA retirement assets every year. Other ad-hoc duties to provide information occur when an insured gets married or leaves (withdraws their vested benefits). Certain situations also require the foundation to proactively provide information, such as if there are changes to the organization or to the regulations or in the event of a partial or total liquidation. 

Is there an impartial office that can provide me with information even if I am not insured with the pension fund?

The BVG Auskünfte association (website only in French and German) answers your questions about pension funds and retirement savings free of charge.

Are pension funds regulated by external agencies?

Every foundation in Switzerland is subject to an independent cantonal BVG/OPA regulatory agency (Art. 61 BVG/OPA). This is based on the ordinance on the regulation of employer retirement plans (Art. 2 para. 2 BVV/OPO). AXA’s collective foundations are regulated by the BVS ZH because their main offices are located in Winterthur.

What does the BVG regulatory agency do?

The BVG regulatory agency oversees the occupational benefits institutions whose purpose is to provide occupational benefits. They ensure compliance with legal regulations by reviewing regulations, annual reporting (such as annual reports or annual financial statements) and the report of the statutory auditors and experts for occupational pensions. The BVG/OPA regulatory agency then takes steps to remedy the situation. They also provide advisory services. They give legal advice and offer preliminary reviews for various business transactions in an occupational benefits institution.

Summary and tips

Which pension fund will work for my company? We have put together some helpful tips for you.

Which is the best pension fund?

There is no definitive answer to this question. The key point here is to know what is important to your business and your employees. If you're looking for higher returns on your retirement assets, then this will influence your choice of pension fund. The same applies if you want the minimum risk. Since your needs have an enormous impact on the type of pension solution you will choose, we recommend you seek out professional advice.

And you should not just look at the key figures and performance when choosing a pension fund. It’s much more important to make sure your retirement plan meets your individual needs. In the best case scenario, you will also consider the following aspects when selecting the pension fund that is right for you:

• Flexibility in defining the benefits to be insured
• Personalized advice for employer and insureds
• Online information / simulation tools for employer and insureds
• Sustainable asset management

Are you looking to switch pension funds? Click here to see if and when this is worth it.

Checklist: Top 4 criteria for evaluating a pension fund

Assessing a pension fund is a complex task. These criteria will help you:

1. Pension plan: Compared to a full insurance foundation, semi-autonomous solutions offer considerably better opportunities for larger investment returns. The likelihood of better interest on retirement assets increases as well.
2. The ratio of active to deferred insureds: The larger the ratio of active insureds, the better the impact this has on unwanted cross-subsidization. For long-term inflows, a lower average age of active members is a great advantage.
3. Asset allocation: The selection and weighting of investment classes has an enormous influence on performance. It makes a big difference, therefore, whether the share of equities is 15 percent or 30 percent, for example. 
4. Long-term outlook: Investments and portfolios are subject to fluctuations in value. Some years will see poorer performance. Keep this in mind when you analyze the long-term net performance of a pension fund.