IT-adminis­tra­­tion plat­form for security-linked pension entitlement


The Security-Linked Pension Entitlements (WpVz) represents a modern operational pension scheme and can be designed as an attractive pension plan combined with a holistic IT administration platform. The advantages of the WpVz - particularly in times of low interest - are obvious.

General challenge with classic pension entitlements

Employers with classic pensions entitlements for employees are subject to provision requirements. Pension provisions are discounted with the actuarial interest determined by the Federal Bank.

Considering the extremely low interest rate level, additions to the pension provisions are increasing in a disproportionate manner. The provisions reduce the outcome of the commercial annual statement and influence the balance profit that can be distributed to shareholders. This additional expense negatively impacts the affected employer, while decreasing net equity and creditworthiness. This excess addition to the pension provisions does not affect taxes in the balance of trade, because the taxed partial value is still discounted with a legally fixed interest rate of 6 %.

Modern company pension: security-linked pension entitlements

Advantages compared to classic pension entitlements: With a security-linked pension entitlement, the pension obligation is no longer evaluated in an actuarial manner, but rather the value of the obligation is determined solely based on the fair value of the security. The problem with classic pension entitlements - the constantly decreasing interest rate for the valuation of pension obligations, the so-called melting interest - does not exist with security-linked pension entitlements.

The capital investment within the scope of security-linked pension entitlements is normally pledged or secured through a trustee, a so-called Contractual Trust Arrangement (CTA). If there is an access-free outsourcing of the capital investment, the capital is seen as cover assets and is offset in the balance sheet with the obligation or provision. Thus, this does not result in any provisions in the balance sheet.

Legal occupational design of security-linked pension entitlements

The amount of the security-linked pension entitlements results from the value of a capital investment and is correspondingly actually the pure form of the defined contribution. The pay&forget method of the pure defined contribution is not permissible for pension entitlements according to the Company Pensions Act. In§ 253 Commercial Code, the German legislator appealed to a“guaranteed minimum amount”. Correspondingly, the pension payment must be provided equal to the minimum amount even if the value of the securities is insufficient to cover the guaranteed pension.

In practice, the minimum amount is in regard to the total of the defined contributions confirmed up to when the pension is to be paid out (or upon exit). A higher guaranteed payment can be agreed upon as well, for example, to the amount of a minimum interest rate applied to the contributions. During the commercial valuation of a security-linked pension entitlement that improves the minimum payment through a guaranteed interest rate, however, it must be examined individually to see if the respective fair value on the balance sheet date exceeds the actuarial value of the minimum payment. In this case, the actuarial valuation, however, is more expensive. Thus, it is recommended to only define the total contribution as a guaranteed minimum payment and to designate the realized profits to improve payment without guaranteeing the profits based on an amount.

The security-linked pension entitlement is therefore a pension entitlement based on a contribution, which has an occupational obligation scope based on the value of the planned assets (securities).

IT - administration platform for security-linked pension entitlements

adesso insurance solutions has years of experience in the administration of fair value accounts. With the knowledge that has been established in the in|sure CollPhir Fair Value Account Module standard software solution, we are creating a platform to bring together different players in the context of security-linked pension entitlements, such as employers, employees, (security) service providers as well as investment companies, insurance companies or pension advisors.

Initially the employer and service provider complete a framework agreement for the investment. A difference can be made between a collective investment for all employees and an individual investment for each individual employee; furthermore, the individual investment can differ between a uniform investment model and age-dependent life-cycle models. In a life-cycle model, the asset manager reduces the risk with increasing age, which in the simplest version means that older employees are successively restructured from high-risk into low-risk investment classes.

The following investment plans can already be represented in the platform:

  • Framework agreements with clearly defined products,
  • Investment plans in fund products, if necessary, with an illustration of a life-cycle model,
  • Investment plans with different risk classes that are managed by the asset manager,
  • Investment plans with different fund products for individual risk diversification,
  • Investment in insurance products,
  • Investment in time model,
  • Combinations from the aforementioned forms.

The investment plans can be filled with different ancillary costs in the platform. Ancillary costs may include, for example:

  • Administration costs,
  • Costs for insolvency insurance,
  • Costs for broker/advisor,
  • Costs for biometric risks.

One or several agreements for the desired investment form are completed for each employee. Throughout the duration of the framework agreement, the service provider can offer the employee a change of investment form or a restructuring.

A central component of the platform is the administration of virtual custody accounts for each employee with the affiliated booking processes. The platform keeps a custody account for each employee where the individual valuable components are booked specific to the period and their development is displayed.

Furthermore, the platform has defined input and output interfaces that can be used to fill data and for reporting purposes. On top of all this, there are portals available for process participants, such as employers, employees and service providers, for example, investment companies or insurance companies.

Conclusion

To this date, the security-linked pension entitlements have played more of a subordinate role in company pensions. Despite the fact that they provide the company pension stakeholder with many benefits. There is a lot speaking in favor of a security-linked pension entitlement for large companies (employers). Employers enjoy the freedoms of a capital investment and are exempt from the effects of balance sheet indicators. Employees receive attractive performance for their company pensions. Providers, such as investment companies and insurance companies, have the possibility to use their highly profitable security products as reinsurance for their company pensions.

With the holistic platform solution, a simple possibility exists to manage this modern company pension scheme. adesso insurance solutions has therefore created a further cornerstone for the propagation of security-linked pension entitlements.

 

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