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Economics trumps demographics

The challenges facing Swiss pension funds owe more to economics and less to demography than is generally realised.

Official statistics show less change in Switzerland’s population structure in recent decades than is generally assumed. The proportion aged 20-64 – at 62% – was the same in 2014 as in 1990. Essentially the share of the population under 20 has dipped a bit and that over 65 has risen by a corresponding amount. In relative terms this probably means slightly more is being spent on elderly care and marginally less on education.

Demographic changes tend to be slow and predictable. They are also hard to influence in the short or medium term. One significant exception, immigration, could work to Switzerland’s advantage from a demographic perspective. Most migrants are well below the Swiss median age of 42.

The economy is another matter. A sluggish economy is bad for society as a whole and for pensioners in particular. It is also something that politicians have in their power to improve. The challenge for them is to create a favourable framework for economic growth.

It is too often forgotten that pensions are essentially an inter-generational transfer. They are a payment from those in work to those who are no longer of working age.

That is just as true for first-pillar pensions as it is for second-pillar ones. In the first case the government taxes the population and channels a portion of the revenues to pensioners. In the second the revenues come from financial assets but they are still ultimately derived from current economic activity. 

When employees invest in a pension fund they are essentially making a claim on future economic activity via the ownership of financial assets. They are not literally building up a stock of goods and services for future consumption.

The channel through which current revenues reach pensioners is fundamentally different in each case. And there is considerable room for debate about their relative merits. But both occupational and state pensions are derived from current economic activity.

Of course it would be unfair to single out Switzerland’s plight. Its economic performance is roughly in line with some of its neighbours. Admittedly the relatively small size of the Swiss economy makes it more vulnerable to outside influences. Deflation in the euro-zone clearly has an adverse effect on Switzerland. And the relatively strong Swiss franc creates additional challenges.

Naturally asset managers should do the best they can to generate strong performance for their clients. But there is a limit to what they can achieve in a low growth environment. Good managers will simply do relatively well at the expense of weaker ones.

Economic growth enables the overall size of the pie to grow. That is why it should be such a pressing concern in Switzerland and elsewhere. 

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