Cost-benefit ratio of a pension fund: Overview

A week ago in Flash 47, we discussed that your pension plan is not the responsibility of your pension fund, but of your employer. Today we focus on how the benefits defined in the pension plan can be delivered with the best possible cost-benefit ratio. This shifts the focus directly to the pension fund itself.

For the evaluation we adopt the perspective of an SME looking for a new occupational pension solution with a collective pension institution. However, the criteria discussed can also be applied to the evaluation of a company-owned pension fund. And of course these criteria are also relevant for you as an insured individual when assessing whether you are insured with a good or a bad pension fund.

Once the desired benefits in the pension plan have been defined, the first step is to determine which pension fund offers the best deal or the best price for these defined benefits. This involves comparing the cost and risk contributions required by the pension fund for the benefits specified in the pension plan. Those who prefer a more detailed analysis can also break down the pension fund's cost regulations into their individual components to see whether and which additional cost elements are passed on to the insured. The level of savings contributions is not included in the offer evaluation because these are credited directly to retirement savings.

The remaining evaluation criteria concern the pension fund itself and thus the provider. The various quantitative indicators can be found in the pension fund's annual reports, and for several criteria a multi-year comparison is useful.

Ultimately, the weighting of the different criteria in an overall evaluation is largely a matter of preference. A fifty-fifty weighting of offer and provider criteria is certainly reasonable.

Within the provider criteria we distinguish four dimensions: return & risk, costs, benefits and «soft factors».

Because the first three quantitative criteria will be examined in separate Economico Flashes in the coming weeks, we limit ourselves here to a short discussion of the «soft factors».

One quality feature of a collective pension institution is how flexibly it can accommodate a company's wishes regarding the design of its pension plan. Some pension institutions are quite rigid in this respect, while others operate according to the principle «anything goes» as long as it remains within the legally defined framework.

Another important feature is the availability of comprehensive information and advisory services. Insured members of such a pension fund gain access to independent and competent advice and therefore make better financial decisions aligned with their interests.