Liberty News - Collection and community institutions are on the rise

The number of collective and joint institutions has remained stable despite the ongoing consolidation process in the 2nd pillar. On the contrary, their assets under management have risen sharply. This is likely to be accentuated further.

The number of second-pillar pension plans has been steadily decreasing since the introduction of the Occupational Retirement, Survivors and Disability Pension Law (OPA) in 1985. In contrast, the trend has been in the opposite direction for assets, which have increased continuously. At the end of 2021, around 1'200 billion Swiss francs were distributed among 1389 pension funds. Half of this capital is held by collective or joint institutions (CJI), compared with 20% eight years earlier. This is the result of the latest pension fund study by Credit Suisse. It is based, among other things, on a survey of over 100 pension funds. According to the survey, 58% of respondents expect this consolidation to continue at the same pace or even faster. Only 40% expect it to continue at a slower pace.

Consolidation process likely to continue

One important reason for this consolidation process, which has been going on for many years, is the increasing regulation, which is more difficult for small pension funds to cope with than for large ones. In addition, the search for suitable employee representatives on the foundation board is often difficult, not least in view of the associated responsibilities and possible liability risks. CJIs are also likely to attract increased attention from legislators and regulators due to their higher profile and increasing competition.

CJIs have a higher risk capacity

At 66% the share of active members in the pension capital of active members and retirees at the end of 2021 at the collective institutions was significantly larger than at the other pension institutions (joint institutions 59%, single-employer PI 58%, and multiemployer PI 52%). On the other hand, CJIs also have the risk of losing connections to other competing CJIs. Deeper planning certainty or negative dilution effects may be the result. In the Credit Suisse survey half of the CJIs indicated that there were currently no provisions to mitigate such dilution effects.

CJIs have similar investment behavior to the other PIs

In fact, collective and joint institutions have, on average, very similar investment behavior to other pension institutions (PI). At first glance, this is surprising since, for example, the younger average age structure of the CJIs has a positive impact on risk-taking. The study shows that the key determinants of investment strategy overall provide for a similar starting position compared to the other pension plans. However, the very similar asset allocation may be justified on balance, the study authors find.

CJIs are under increased scrutiny from legislators and regulators

Collective and joint facilities already existed before the introduction of the Occupational Pensions Act (OPA) in 1985, but a look at past developments shows that the SNB only addressed the peculiarities of CJIs to a limited extent. This is because in this competitive environment, there is a trade-off between growth and stability. To provide providers with a certain framework in this respect, the legislator enacted Art. 46 BVV 2, which came into force in 2012. In it, benefit improvements are made dependent on the level of value fluctuations. Benefit improvements may only be made once the value fluctuations have accumulated to 75%. Due to their increasing importance, legislators and supervisors are paying more attention to the special requirements of pension plans that are in competition with each other.

What speaks for the one, what for the other form of management?

In the survey of decision-makers from both stand-alone pension institutions (individual PIs) and CJIs, the question was asked about the factors in favor of one or the other form of management. With more than 60%, the majority said that CJIs stood for a «relief of responsibility for employers and employees». A similarly clear result emerged for the criterion «high level of professionalism and expertise in pension fund management». More than half of the survey participants stated that this was clearly or rather in favor of joining an CJI. Only 9% believe that a stand-alone PI would be better off in this respect.

Around 89% of respondents see the strongest criterion for an individual pension fund in the stronger relationship between the employer and the foundation board to the pension fund. The individual pension funds also perform significantly better than the CJIs when it comes to the scope for shaping the pension fund management or determining the investment strategy. The option of choosing between the various forms of management, not least the full insurance solution, is positive for pension funds. At present, however, the consolidation of recent years also suggests that (partially) autonomous CJIs can meet the needs of many - especially small to medium-sized - pension funds very well.