Switzerland’s system of direct democracy is complicating the debate about pensions reform, writes Barbara Ottawa 

The Swiss system of direct democracy is complicating the debate on pension reform. Shifts in the public mood are important since key political decisions, including the introduction of the proposed pension package, are subject to a referendum. It is hard to predict how factors such as the advent of negative interest rates by the Swiss National Bank (SNB) and the appreciation of the Swiss franc will influence the electorate.

At a glance

• The Swiss system of referendums on decisions that involve constitutional change can make it harder for politicians to reach agreement on pension reform.
The climate of low to negative interest rates is adding uncertainty to the political debate. 
Economic worries might sway voter opinions either way on the proposed Altersvorsorge 2020 retirement provision package. 
Analysts remain sceptical that the proposal will pass Parliament.

In May, the debate on the Altersvorsorge 2020 pension reform package was in its early stages with one parliamentary sub-committee discussing the proposal. The package includes a cut in the conversion rate from 6.8% to 6%. This is the clause the government dreads putting to a referendum as the electorate rejected a lesser cut – as part of a different reform package – in 2010. 

In fact, pension experts have been arguing this cut is still well short of the real conversion rate already applied by Pensionskassen where pension contributions are above mandatory levels. They only have to guarantee the legal minimum for the mandatory part of the contributions they receive and on average the conversion rate has fallen to below the 6% threshold.

However, unless it is broken up into separate elements, it is certain that the proposal will have to face a public referendum. This is because it also includes an increase in the value-added tax (VAT) rate to help finance AHV/AVS, the first-pillar pension fund, and its sub-funds for invalidity, military service and maternity leave. The electorate has to agree to any changes because the VAT rate is stipulated in the constitution.

In 2014, AHV/AVS  had to pay out more than it received in contributions, for the first time since 1999. To make matters worse, the shortfall, at CHF320m (€261m), was 10 times higher than forecast. The discrepancy was explained by the impact of corporate taxes on first-pillar contributions and high unemployment. A return on investments of over 7% helped the fund end the year with a surplus of over CHF1.7bn. 

The Swiss Social Democratic Party (SP), whose parliamentarians include the interior minister, said the funding problems could be solved by the proposed increase in VAT. But employer representatives, along with the centre-right party (SVP), are not convinced about demanding immediate reforms to the first pillar. The sceptics reiterated their criticism that the reforms are heading in the wrong direction.

This debate, as well as the measures taken by the SNB to weaken the currency, have received ample media attention. “The public is more aware about these topics,” says Christoph Ryter, president of ASIP, the Swiss pension fund association.

At the Pensionskasse for the Swiss federal railways (PKSBB), for example, managing director Markus Hübscher finds that the debate on negative interest rates and the difficult market environment has helped the introduction of necessary cuts to technical parameters.  

“Previously, many members did not understand the link between low interest rates and low expected returns of a pension fund; but with a negative interest rate they do now,” he says.

Of course, it has helped that the federal railways company SBB agreed to make additional payments to maintain the level of pension payments over the transition period as its conversion rate is cut from 5.8% to 5.22%.

Peter Zanella, managing director at Towers Watson Switzerland, says the public debate could help swing sentiment in favour of some measures in the reform package. In 2010, the electorate voted against a cut in the conversion rate to 6.4% but Zanella says the proposed cut to 6% might now be easier to achieve. 

Other analysts are less optimistic. UBS has pointed out in a research note that the negative interest rate environment increases uncertainty for all, including pensioners. Pension payments have long been left more or less untouched in Switzerland, although in cases of underfunding some Pensionskassen can also include pensioners in recovery measures – at least by not indexing their pensions in future. UBS sees less future willingness to contribute to reforms, including a conversion rate cut. 

Similarly, Avenir Suisse, a Zurich-based think tank, identified a muted public appetite for change in its annual Reform Barometer. According to the think tank, the reform package could easily be stalled in parliamentary debate. It also points out that pension reform without an increase in the statutory retirement age “is unnecessarily expensive and not sustainable”. The authors see the danger that an increased VAT rate and higher contributions to the second pillar necessary to level out the cuts in the conversion rate will be a burden on workers and companies. On a positive note, they calculate that the package would almost halve the funding deficit in the AHV.

Jérôme Cosandey, a director at Avenir Suisse, notes that the strong franc has put economic

policy topics on the political agenda, which means the financing of reforms has become a subject for debate once more. This might render reform proposals, such as the scrapping of the Koordinationsabzug (the salary threshold above which contributions to Pensionskassen have to be paid) more difficult. This measure is intended to help part-time workers save more in the second-pillar.

Overall, Cosandey sees no change in public opinion on the pension reforms. “The camps and trenches are the same as before,” he says. The only change is that in the difficult economic environment, “the readiness to burden companies with anything labour-related has shrunk”.