1. How the lump-sum benefit fund works
The lump-sum support fund is a so-called entrepreneurial or insurance-free way of implementing company pension schemes. It works entirely without insurance. The primary goal is to create liquidity or liquidity reserves for corporate financing or to create bank independence through internal financing (alternatively, free capital investments apart from insurance). Further goals are to strengthen employee loyalty and gain advantages in recruiting.
The function is very simple:
The deferred compensation or a monthly contribution provided by the employer are not transferred to an insurance company, but remain in the company and are available to this company over the long term. The employer pays interest on these monthly contributions from deferred compensation and / or an employer’s allowance and then usually pays this amount as a single contribution to the employee at the start of retirement. As a result, this is as easy and transparent for the employee as a savings book, which is also built up through contribution (payment) and interest. The payment obligation is precisely calculable and transparent for everyone and the time of payment is fixed from the start, regardless of whether the employee leaves or stays.
A simple example to understand the lump-sum support fund:
From the employer’s point of view, the pdUK can be compared to a loan from the employee to the company at a fixed interest rate with a fixed term.
From the employee’s point of view, the comparison is most understandable using the example of a savings account, on which monthly payments are credited and interest, and whose balance anyone can recalculate.
The following explanations relate to the case of a company pension scheme through deferred compensation or mixed-financed systems. This means that the employer gives a certain amount of deferred compensation depending on the amount of deferred compensation, length of service, position and function in the company or similar (see also my legal tip: “Employer subsidy, conversion: direct commitments, direct insurance, lump-sum U-fund “).
2. Effect of the commitment interest
Anyone who has understood how the lump-sum benefit fund works and knows how it works will also understand that the commitment interest is of key importance. Whether an employer pays 1.00% or 2.00% interest on the employee’s deferred compensation makes a decisive difference for both the employer and the employee. The interest is set exclusively by the employer.
2.1. Determination of a generally higher interest rate
The promise of a higher interest rate of, for example, 2.00% or 3.00% makes the lump-sum benefit fund understandably more expensive for the employer. With the conversion of remuneration, the employer must actually achieve around this 2.00% or 3.00%. If he earns more, the advantage for him is correspondingly smaller.
However, the higher the interest rate, the more attractive the model will have on the employee. Employees tend to be more willing to participate in deferred compensation when the interest rate is higher than when the interest rate is lower. You will then be happy to convert a higher amount.
In the case of employer-financed pension schemes, the employee receives a benefit without any further action. Here the interest has only a subordinate meaning. Whether the employee has left the company or not, this interest can ultimately be earned with the employer’s monthly contributions or deferred compensation.
2.2. Determination of a generally lower commitment interest
A commitment interest that tends to be lower, for example 1.00% or 1.25% or 1.50%, naturally leads to lower performance for the employee and a lower level of commitment for the employer. If the employee leaves, only this interest can be earned. If a higher interest rate is earned, there are also higher opportunities and returns for the employer.
Even an interest rate of 1.25% leads to significantly higher benefits compared to insurance.
A simple example of a comparison between a lump-sum benefit fund and an insurance company:
While an insurance company with a deposit of € 100.00 usually only has a surrender value of a good € 50.00 after one year, with a flat-rate relief fund and an interest of 1.50% this is € 101.50 and thus around twice so much.
3. Effect of the employer’s subsidy
The employer’s allowance can be dependent on the deferred compensation as a certain percentage or a fixed amount, it can depend on the length of service or on a certain grouping and the regulations foreseen for this.
3.1 Effect of a higher and more generous grant
The higher the subsidy, the more expensive the pension fund becomes for the employer and the higher the interest that the employer ultimately has to earn with the conversion of remuneration if the system of the flat-rate benefit fund should be cost-neutral.
If an employee leaves, a subsidy no longer has to be paid while the interest continues to run.
3.2. Effect of a lower grant
Even if, unlike in the case of insurance-like implementation channels, no subsidy is stipulated for a relief fund and the 15% employer subsidy that applies to direct insurance, for example, is not mandatory here, such a subsidy looks petty and looks after the saved employer contributions are merely passed on Social security off. A lower subsidy is less attractive for the employee, but it is also easier to generate in a cost-neutral manner.
4. Interaction between interest and employer subsidy
Both interest and subsidy must ultimately be earned by the employer. For the employer, in addition to assuming the costs of the model itself, they represent the essential points that make the system attractive.
While the promised interest also has to be generated with the free liquidity, the employer’s subsidy can ultimately only be generated through a corresponding interest rate on the free liquidity if the system is to be cost-neutral. As a rule of thumb, an employer subsidy of 50% requires an interest rate that is approximately 1.00% above the commitment interest if the subsidy is to be generated cost-neutrally with the free liquidity, i.e. after deduction of costs.
A higher employer subsidy is always viewed psychologically by employees as more attractive than a higher interest rate. This is simply due to the fact that people can only think linearly and do not understand interest and compound interest. An employer subsidy, on the other hand, is specific and tangible for everyone.
5. Recommendation
Finally, I can make the following recommendation.
We recommend a lower interest rate and, to compensate for this, a more generous employer subsidy, in a separate commitment. Two commitments do not cause more administrative work or higher costs. If you leave, the grant does not apply. It does not apply to the past as long as vesting has not yet been achieved and it does not apply to the future in any case. From this point on, the contributions only continue to bear interest.
Always have a break-even rate calculated for offers so that the model is cost-neutral for you, including the grant. Vary your ideas and options and find an optimal model for you and your employees in this way (see my legal tips again: “Employer subsidy, conversion of remuneration: direct commitments, direct insurance, flat-rate U-fund” and “flat-rate support fund – check and assess providers , Minimize risks “).
In case you have any questions, you can contact me.
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