Change of job after age 50

Job change: the pension plan more important than the salary ?

Several elements can motivate a change of job, such as a new professional opportunity, the desire to give more meaning to one's activity, the desire to become independent, the fact of being made redundant or, more simply, more attractive remuneration.

The motivations behind such a change belong to everyone and have generally been the subject of in-depth analysis. However, a salary increase does not always imply a better retirement. And this point should not be underestimated!

Indeed, a change of employer also implies a change of pension fund, or even membership in a new welfare plan for the self-employed. So what factors should be paid attention to?

To answer this, we recall below the main elements which allow us to get an idea of the robustness of a pension fund, in the case of primacy of contributions.

1. The conversion rate : the indicator most monitored by policyholders, it applies to the pension capital projected upon retirement and thus makes it possible to calculate the amount of the pension.

It should be noted that discussions aimed at lowering this rate only concern the so-called “compulsory” part of the pension plan, i.e. the accumulation of contributions for the salary bracket going from 21,510.- to 86,040.-. In general, this “compulsory” capital represents a sum of less than CHF 450,000 at retirement age.-.

Depending on the pension plan, the fund may apply different conversion rates between compulsory and extra-mandatory parts, the rate on the extra-mandatory part then being much lower to compensate for the high level of the compulsory part, compared to the reality of mortality tables. The “enveloping” plans will use a single rate, weighted average between the rates applied to the mandatory and extra-mandatory parts. Finally, we will remember that certain funds require a capital outflow for part of the non-mandatory assets, to protect against the longevity risk of its affiliates.

• The coverage rate : a key element in getting an idea of the solidity of a fund, the coverage rate is the ratio between the cash register fortune and its future commitments (the pension capital). We must be wary of funds suffering from a low coverage rate (ie close to or less than 100%, especially if the latter is added to an aging “aging” demographic, because the risk of introducing restructuring measures is then significant (including the risk of a drop in the conversion rate).
• The returns offered to policyholders : It is interesting to know the management profile of the fund and its historical performance. These do not necessarily correspond to the return paid to policyholders (this is a decision of the Foundation Board). In general, the more robust a fund is, the higher it will be able to award a return to its policyholders, particularly if the value fluctuation reserve is covered. This reserve is between 10 to 20% of the pension assets and depends on the management profile of the fund.
• The technical rate : this is a discount rate used to calculate today's value of the fund's future commitments, i.e. the annuities that will be paid to retirees and future retirees. According to the present value principle, the higher this rate, the lower the present value of future commitments. Therefore, this rate is critical for judging the quality of the coverage rate, since the latter is the ratio between the fund's assets and its future commitments.

The Swiss Chamber of Pension Fund Experts issues a recommendation each year, with the latest rate being between 1.68% and 1.98%, a lower level than that used by many pension plans. Thus, compared to recommended rates, most funds overestimate their coverage rate.

• The demographics of the provident fund : It is interesting to get an idea of the proportion of retirees/active people in a fund (also called “dependency relationship“), as well as the average age of policyholders. Thus, the younger the population of a fund, the more robust it will be.

It will be remembered that to date, retirees benefit from a “fixed” conversion rate and that therefore any restructuring measures that the fund could face are entirely the responsibility of the active insured persons and the employer.

• Insurance benefits : LPP contributions are separated between a savings contribution and a risk premium. The latter covers non-life risks and can vary greatly from one fund to another. The multiplicity of existing plans is such that we will not develop the subject in this letter. However, it is appropriate to check that any insurance taken out privately does not duplicate the fund's plan.

Let's now take a simplified example: Mr Dupont, 55, a senior executive, currently receives a salary of CHF 300,000.- per year and has a pension of 1.3 minutes. He plans to retire early at age 63, the age at which his current fund (enveloping plan) will pay him a conversion rate of 5.3%.

A career opportunity is available to him and he is offered a salary of CHF 345,000.-an increase of 15% or CHF 45,000.-per year. The pension plan (also enveloping plan) of the new employer indicates a conversion rate of 4.6% at age 63 and savings contributions equivalent to the plan of the previous employer. The cumulative difference between the two salaries from age 56 to 63 is CHF 360,000.- (in this example we use cumulative rather than updated values, for the sake of simplification).

On the other hand, upon retirement, the projected LPP pension drops by around CHF 18,000.- per year with the new employer's plan. Based on a life expectancy of 85 years, the cumulative difference is CHF 481,000.-.

We therefore see that examining the pension plan proposed by the new employer is an important element in judging the overall quality of their job offer.

The following elements will be remembered:

1. When examining a new employer's pension plan, a set of indicators must be used to judge the strength of its pension fund, beyond the simple conversion rate.
2. The higher the age at change, the greater the conversion rate differential produces a net effect.
3. The greater the free passage assets brought into the new cash register, the greater the conversion rate differential produces an impact.

Finally, the considerations linked to the pension plan must be part of the broader framework of the organization of assets and the planning associated with it, by analyzing in particular the hypothesis of a buyback plan, a partial capital outflow upon retirement, as well as all tax optimization measures linked to such elements.

Impact Financial Engineering of course remains at your disposal to study your present and future pension plans and advise you on how to articulate these elements in the context of the overall organization of your assets.