Don’t be fooled by size. Small can be beautiful. The Robert Bosch scheme is small but it has a big heart and even bigger ambition. It has already notched up a series of firsts: first Pensionsfonds-type scheme to be offered by an industrial group in Germany; the first to receive a schedule of contribution from its sponsoring employer; the first to switch existing liabilities under the firm’s previous pensions arrangement to the new scheme.
Bosch puts its success down to a highly efficient and sophisticated organisation. Its revamped pensions arrangement resembles most closely that of a conventional defined contribution scheme, but guarantees and employer contributions plus a rigid risk management philosophy add a touch of defined benefit. Thus Bosch prefers to call its new scheme a hybrid.
The scheme owes its innovative structure largely to the new laws governing Germany’s occupational pension fund market as it opens up and no longer relies just on the old-style Pensionskassen, to provide capitalised benefits, as the Pensionsfonds gets its inspiration from mature markets like the UK and the Netherlands, as well as the EU’s pensions direc tive. Such has been its success that the active membership has gone from 20,000 to over 90,000 in just a few years. Bosch’s German workforce numbers some 110,000, so you could say the scheme’s appeal has grown immeasurably.
So how is the scheme funded?
Firstly, it relies on contributions. There is a strong balance between the company’s input and what the members are willing to commit themselves. Bosch expects the firm’s contributions each year to be somewhere between €75m and €80m, with the total members are willing to set side each year being between €15m and €20m.
Next, it has a devised an investment strategy that offers flexibility with high returns and optimised risk management. According to Bosch, under German law, the level of sophistication of the investments it can offer can only be done so by a Pensionsfonds. This gives workers in occupational schemes a much better opportunity to secure a meaningful income in retirement.
Bosch says it has gone for an investment strategy that includes both conventional asset classes and alternative investment classes. It adds its portfolios are diversified and invested either through Spezialfonds - large mandate structures run through a master KAG, enabling recognised specialist investment services to be provided to Germany’s fast-developing industry-wide and corporate funded-style pension schemes. It used the popular beauty parade method to select its managers.
The scheme looks at each member’s profile before deciding on the best way to invest their assets. This is based largely around age and corresponds to a life-style defined contribution approach. So a growth investment style is used for members under the age of 55. This relies heavily on returns from a 50% allocation to equities as the return potential is higher.
When the member turns 55, his/her assets are gradually re-allocated to the safer fixed income portfolio, to provide capital preservation as retirement date comes closer.
The principle behind this approach is allowing the members to take greater risk at a younger age by investing in higher return, higher risk asset classes, then taking their pot and investing it in bonds as theynear retirement. This way, they consolidate the money they have accumulated in the higher risk stage.
In a traditional defined contribution scheme, the members bear all the investment risk. Not so in Bosch’s new arrangement. The scheme offers a certain level of guarantee, which means part of the risk is offset back to the company. Bosch is keen to keep a tight rein on its risk management. This is supervised by an independent investment controller to ensure there is no conflict of interest and that risk tolerance levels and budgets are respected and used optimally.
Running a pension scheme - large or small - can be costly. But there are various ways to keep costs down. In recent times, outsourcing elements of administration and services has become popular, as it allows schemes to focus internal resources on building investment skills and knowledge in-house. It also ensures efficient administration because specialist firms take on the work. Bosch supports this view and has reduced costs significantly by outsourcing. Internet access also gives members instant access to their accounts at a cost to the company of running a website.
The results speak for themselves. Assets under management now exceed €440m, the highest amount for a German corporately provided Pensionsfonds. Returns for the years 2003-05 surpass 38%. This is some achievement for a scheme that is labelled ‘small’.
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