BAV costs in general
Application forms of insurance-based employment pensions, such as direct insurance, pension funds, and pension funds, on the one hand, and non-insurance models, such as direct commitments and lump-sum provident funds , on the other hand, are so systematically different that a comparison of the respective costs is only a subordinate and subordinate aspect.
However, in advisory practice, questions are often asked about costs and an attempt is made to compare life insurance or pension insurance with company pension plans that are exempt from insurance. However, the comparison often falls behind or becomes an apples and oranges comparison. This is due to the following points:
1. Costs assumed by the employer or the employee
In company pension plans, the costs of insurance-type systems are mainly charged to the insurance contract. Therefore, it reduces each payment and, therefore, each deferred compensation of the employee. In fact, they are borne by the worker and reduce his contract and his subsequent benefit from it. This is also the reason why, in connection with falling interest rates, even the market leaders in the insurance industry have given up the previously taken for granted premium guarantee and, for example, only guarantee 80% of premiums paid at maturity. . Even so-called fee rates are only exempt from agent commissions, which are billed separately, but still contain costs.
In the case of the lump sum provident fund, these costs are borne by the employer. It does not reduce the planned monthly employer contributions or the deferred remuneration of the workers and accrues interest from the first euro. The costs are operating expenses and increase the effective interest the employer must earn on these monthly amounts.
2. Scope and content of company pension costs
In principle, the costs in insurance contracts are made up of four large blocks of costs:
closing costs and sales,
ongoing administration costs,
investment costs and fund company costs,
The costs of legal advice, essential in company pension plans, from the preparation of the necessary labor law documents, such as pension plans, salary conversion agreements or pension commitments for the CEO or the board, are not included. of administration, to documents on insolvency protection. . In some cases, however, insurance companies distribute free samples with no obligation. If the employer wants to minimize liability at this point and needs legal advice, additional costs will arise here in addition to the costs included in the product.
With models like the lump sum provident fund, the two cost blocks are setup fees and administration costs.
The requirement of legal advice as direct acceptance of the order (and therefore the creation of individual documents such as pension plan, salary conversion agreement, company agreement, pledge agreement, pension commitment, etc.), which also specifies the Federal Association of Provident Funds in the quality guidelines, is regularly included in the rates of the facilities, as well as in all the Advice for employers and employees up to the preparation of pension documents.
Administration costs include all administration as fixed per capita costs per year with no additional burden to the employer.
3. Amount of company pension expenses
The amount of the costs is as different as the providers, both for life insurance companies and for lump-sum pension funds.
In the category of acquisition costs, these were between 6.5% and 12.94% for the 10 insurers presented in 2018, according to a presentation by procontra online. The insurance magazine indicated the costs in 2020 as follows: “German insurers require an average of 8.7 percent of net premiums earned per administration, Europe as a whole only 5.8 percent. With 17 .5 percent, acquisition and distribution costs also exceed the European average of 15.6”
After asking the Federal Association of Flat-Rate Provident Funds, the establishment fees for these types of pension plans are mostly between 1% and 2% of supply volume. Some providers also have fixed setup costs per capita. Only contracts that have been set up are billed.
Depending on the provider and the size of the company, administration costs range between €30.00 and €200.00 per year per employee. This also applies to multiple commitments, such as the usual separation of employer-funded subsidy and deferred compensation.
There are no investment costs if the liquidity is used for internal financing and debt relief. Unit costs per commitment or contract are quite unusual.
4. Cost transparency
Of course, there are also significant differences in terms of transparency. Costs that are calculated externally as fees are often more clearly described and easier to understand than costs that are calculated on products and therefore difficult for many to understand.
5. Conclusion on the costs of company pensions
Costs are hardly a decision criterion for one path or another. The forms of implementation are very different and can only be chosen on the basis of individual target premises and individual framework conditions. The essential factors leading to insurance-free systems are the desire for liquidity, individual designs with no restrictions due to product specifications, partially free capital investment, and efficient employee benefits.
As an economically useful aid for a decision taking into account the costs, the Federal Association of Flat-rate Provident Funds has requested the identification and calculation of an equilibrium interest rate as the interest rate that must be reached for the model to be also neutral cost for the company. Anyone can roughly calculate it for themselves with our bAV calculator for simple models and then vary the commitment interest and employer subsidy as well.
The selection of insurance company and provider is also important and depends on various criteria, see my legal advice “Check Provider”.
I will be happy to help you with your decisions and compare possible implementation options for your pension plan.