Forms of Provision

There are currently five forms in which occupational pension schemes can be provided.

Each of them has its own entitlements with the corresponding advantages and disadvantages. Which form of provision comes into consideration for your business will be discussed in the concept and consultation process.

It is important to realize that it is the employer who selects the form or forms of provision. The same applies for the chosen investment products, because this ensures the company has a handle on its liability.

Direct insurance

In direct insurance, a pension insurance contract for the employee is concluded with an insurance company. The employer pays the premiums direct to the insurer. The employee is promised a benefit at the start of the pension, which they likewise receive direct from the insurer.

The employer selects the form of investment – conventional or linked to a fund. This is because the employer has the right to design as they see fit.

With the implementation of direct insurance, it is very easy to meet the claims of the employees to the conversion of earnings into pension contributions.

Pension fund

The pension fund is a pension organization of independent legal capacity which grants benefits of the occupational pension scheme. The employer pays the premiums – whether from converting earnings into pension contributions or funded purely by the employer – direct to the pension fund.

The employee receives the benefits direct from the pension fund on the benefit date.

Retirement fund

The retirement fund is a pension organization of legal capacity. Here the retirement fund fulfills the commitment to pension insurance that the employer gave the employee. The employee has a direct claim from the retirement fund.

The premiums can be invested on an insurance or fully-funded basis.

Support fund

A support fund is financed by the sponsoring company (employer) in the form of allocations, which may come from the conversion of earnings into pension contributions or employer contributions. There are several ways of delivering the benefits promised by the employer. One option is for the sums to be paid direct to insurance companies. These then take out a reinsurance policy to cover the corresponding insurance benefit (congruent reinsurance). Another is for the sums to be put into investments. The commitment is then funded from the appreciation in value and the formed capital. It is also possible to grant the sponsoring company a loan and then fund the benefits from the interest payments.

In each case the employee has a legal claim against the employer, not the support fund.

Schematic illustration of a congruently reinsured support fund

Direct commitment

The direct or pension commitment gives the employee a direct promise of benefits under an occupational pension scheme. In this form of provision, the company has an obligation to form the appropriate provisions for the benefits. The benefits can be paid through an insurance solution or discretionary investment.

It is important, though, that the promised benefits are available to the employee on the planned benefit date.