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The company, a key pillar for employee retirement

Jan 15, 2025

Redacción Mapfre

Redacción Mapfre

In developed countries and many developing ones, there is an accelerated process of change in their demographic profile: declining birth rates, an aging population, increased longevity, and a strong rise in the inactive population are some of the characteristics shared by advanced societies, especially in the Western world, where population pyramids have been narrowing at the base for some time.

This trend, which seems likely to continue in the future, poses challenges for the financing of retirement pensions, particularly in countries that guarantee these pensions through public pension systems. These systems are based on intergenerational solidarity, where the contributions of the younger generation are used to pay the pensions of retirees, with no capitalization method involved.

Complementing pensions

The anticipated deterioration of the systems means that current employees must seek complementary avenues to secure a future retirement with sufficient resources to maintain a standard of living similar to that achieved throughout their working lives. To avoid relying on a single source of income, the most advisable approach is long-term planning, allocating part of the current income to savings and making regular, systematic contributions.

Countries with the most comprehensive retirement coverage are based on three pillars: a public system, a dedicated savings and investment mechanism through the company, and individual savings. However, not all countries have a public pension system; moreover, for many people, the individual savings effort for retirement can be challenging, as it requires setting aside part of the resources even when there are more immediate needs.

Therefore, the second pillar, which channels retirement capital through companies, becomes the most reliable path to ensure workers accumulate what is necessary during their working lives to secure an adequate pension.

States with well-regulated second pillars typically have mechanisms that not only guarantee the economic well-being of workers upon reaching retirement age but also encourages the assets managed by company pension plans or equivalent products to be invested for financial return, thereby contributing to the country’s economic development.

This type of system has the advantage that part of the contributions are made directly by the company to the worker's fund, while the worker makes their own contributions each month and can, at any time, make an additional contribution.

The relevant role of companies

The advantages of pension products established through companies are diverse. One of these is that, as they involve large groups, the fees and commissions charged by management firms or insurers are usually lower, which translates into more capital directed towards investment and, therefore, higher returns.

Another benefit is that national governments often establish tax incentives that benefit both the company and the employee. But, without a doubt, the main advantage of this system is that people begin saving for their retirement as soon as they enter the workforce.

It’s clear that the earlier we start saving, the more capital we will accumulate, but there’s another crucial reason why long-term savings offer great returns. It is the effect of what is known as compound interest, which allows for a substantial increase in the profitability of savings. It means that the invested capital earns a more or less substantial return. The profit generated is added to the saved capital and reinvested, so that the benefits grow exponentially over the years.

With the savings base formalized through the company, many people may not see the need to go further. However, once a basic pension is secured, the future pension can always be supplemented by a dedicated individual savings product, which allows the total capital saved to grow, especially when people reach a stage of greater financial stability, such as when children become independent or when a mortgage is paid off.

Advantages of saving for retirement through the company

  • Allows contributions from both the employee and the company
  • Costs and fees are lower than those of individual products
  • Often includes tax incentives
  • Saving starts from the beginning of one’s working life
  • Enhances the benefits of compound interest
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