The many U.S. defined benefit sponsors have now taken steps to either close or freeze their pension plan. It is our belief that closed and frozen pension plans are different enough from open plans, that they should be managed with a dynamic approach to asset allocation. In order to do this, it’s critical that plan sponsors with closed and frozen pension plans monitor various plan statistics such as funded status and liability duration. As these stats change over time, sponsors will need to adjust their asset allocation using timely implementation strategies.
- The first step for plan sponsors of closed or frozen pension plans is to identify a target portfolio, which they will evolve toward over time as their funded status improves. This target portfolio will be less focused on equities and other return-seeking assets, and more focused on duration-matched fixed income providing better hedging of the plans interest rate risk. In addition, this target portfolio must focus primarily on liquid assets, because once closed, the plans primary duty is to pay the beneficiaries of the plan.
- It’s also important to recognize that closed and frozen pension plans will also likely experience a phenomenon known as “duration drift”. This is where the duration of the planned sensitivity to interstate movements will decrease with the passage of time. As a result, the sponsors must manage their liability-driven investment strategy to have a duration that is not static but decreases along with the liability duration.
- Lastly, sponsors will need to monitor the risk transfer market in order to successfully select the various tools they have at their disposal including lump sums, annuity buy-ins, and annuity buy-outs. This will allow them to offload risks, in order to decrease the size of their pension plan.
A good argument could be made that closed and frozen pension plans should be managed more dynamically than open and ongoing pension plans. These plans require a good deal of care to achieve a successful outcome.
The occupational VBV pension plan
In the future, the state pension probably will not be sufficient to maintain the standard of living in old age. But you can quietly look forward to it because you belong to the nearly 20 percent of Austrian employees who are covered by an occupational pension plan and will receive a supplementary company pension. A pension fund by employer, Yes, the Austrian pension scheme is based on the so-called “three pillar model”. The most important pillar is the state, and then there are the occupational and the private pension provisions.
- The big advantage of an occupational pension is: Your employer pays for you! and, on top of that, to the country’s large largest domestic pension funds, the VBV. The VBV supports more than 280,000 employees and pensioners and how does your VBV pension scheme actually work? Your employer pays contributions to the pension fund for you, which will accumulate in a VBV pension account until the start of retirement or the termination of employment.
- The money will be invested by the pension fund during the Entire savings phase, with the aim to increase the capital by CORRESPONDING earnings. For whom will the contributions be made and in what amount? This is regulated in works agreements between the employer and the works council and a pension fund contract with the VBV. If there is no works council, standard individual contracts are used. How high will the amount of your VBV pension be?
- The amount of your additional pension will be calculated at the time of retirement, based on the accumulated capital. The payout is a lifelong supplementary VBV pension, in addition to the state pension.
- In case of death, dependents so surviving receive a pension, as agreed in the contract and how does one stay on top of everything? Once a year you will receive a statement regarding the total contributions paid during the last year, as well as the development of your VBV capital.
- You will find updated information and projection possibilities at the website and the best and you can increase your VBV pension yourself with annual employee’s contributions of up to EUR 1000th.
- You will receive an attractive government-sponsored premium and the Resulting pension is up to 100% tax-free.
As you see, a look into the future is worth it! With your VBV pension plan, you can relax and look forward to your retirement!