Company Pension Scheme - Quantitative Comparison of Options

Looking at the crisis of the legal pension scheme, the company pension scheme increasingly gains importance. To reinsure the company pension promises, besides the conventional life insurance also innovative types of investment (like shares, real estates, ship funds) can be used and partially achieve considerably higher yields. Especially in connection with tax savings by accrual for pensions this model is particularly interesting for partner executives.
Because the actuarial calculation of the accrual for pensions as well as the fiscal effect of the different investment forms are mathematically very complex, a comparison of the options available will normally be based on estimations only. By calculating different options for the individual situation accurate to the Euro and presented in a clearly arranged comparison, we offer the operational investor a better decision support.
For this reason we have developed a software application in close cooperation with Garbe • Springstein • Albers Finanzplanung GmbH. The software is used productively by our pilot customer, HCI Ltd., already with big success. We offer you the know-how acquired in this project to develop similar products.
Especially to be highlighted in this context is the close collaboration with Garbe • Springstein • Albers Finanzplanung GmbH. Financial service providers and software developers often speak different languages. In this project, we have succeeded in building a bridge of communication between these two cultures.
Consequently, we can now cover within a single team both, the technical as well as the professional part with outstanding expertise.

Details
1. Pension Reform

The social pension insurance, which for the most people is the main component of their retirement provisions, is in the crisis. The increasing life expectancy and low birth rates are a constraint for its efficiency. Pension shortenings, lengthening of the lifetime working hours and rising premium rates are the consequence. In the long term the system in its present form is no longer affordable. New and different ways of retirement provisions gain in importance.

2. Opportunity for the

By the pension reform in 2001 a change of the old-age provision system took place. The operational as well as the private pension plan, strengthened by government aid, gained new significance. They now have far more than a complementary function regarding the social pension fund. Especially the enterprise pension scheme will henceforth be an essential component of an employees personal future planning. Thereby the legislator expects a high degree on personal responsibility of the social partners: the management's task is to organise the provisioning, the employee's is to finance by voluntary payment.
The pension reform also means an opportunity for the enterprises. More and more employees become aware of the problems with the legal pension scheme and attach importance to an operational provision plan. Attractive pension scheme offers lead to an increase in motivation and identification of the employees with the enterprise. They are an absolute advantage on the markets for qualified manpower. Moreover a smart design will keep the costs low.

3. Accrual for Pensions

A company that offers its employees a pension scheme, must take appropriate actions for the accrual for pensions, to ensure that the assured retirement provisions can be actually paid out. The conventional approach is the investment into an endowment policy (life insurance). The structure of this insurance is already tailored according to the specific problems of a pension scheme. Supplementary payments based on life risks like widow's pension or disability pension are 'automatically' taken into consideration here. Nevertheless, considering yield return points of view the accrual for pensions by a life insurance is not the optimum way. The capital market offers a broad variety of alternative products, from which can be chosen at will in principle. Preferring innovative investment forms is normally significantly more profitable than the conventional accrual by a life insurance.

4. Product Idea

In the consulting practice it is often not easy to convey that an accrual for pensions by innovative investment forms is more attractive than the classical endowment policy. Admittedly, qualitative statements can be made concerning interest rates and yields, but in the real thing the customer commonly tends to minimise the risk and thus decides for an expensive but proven model concerning the accrual for pensions.
The financial and the actuarial computing methods used for a precise comparison of the different models of accrual for pensions are nevertheless too complex to conduct a counselling session with help of a pocket calculator. Also the software products available on the market can provide approximate values at the best, respectively are restricted to only few use cases. That's why we have developed a software application that computes and compares exactly to the Euro different forms of accrual for a concrete pension promise. By variable input of yield return assumptions a risk simulation can be performed.

5. Technical Details

As our development platform we took the Open-Source-IDE Eclipse (www.eclipse.org). The user interface has been build using the Standard Widget Toolkit (SWT). The reason for this was that the application will run on Windows PCs exclusively; SWT there provides a higher performance and a familiar look-and-feel.
For table layouts and printouts we used HTML as well as PDF; they are included into the screen display by OLE techniques.
To prevent the end user from manipulating the offered investment products, different security technologies are provided. The installation takes place either by execution of a setup file or automatically from the internet via Java WebStart.
The use of the software can be controlled by a personalised license file with a limited validity period.