The relatively low expenditure and redistributive nature of the Swiss first pillar and the long presence of a strong and well funded second pillar, make the Swiss pension system better prepared to face the challenges of the future than the most other OECD countries, according to a joint working paper by the World Bank and the OECD on the Swiss multi-pillar pension system.
Under the title of ‘The Swiss multi-pillar pension system: Triumph of commonsense?’, this report highlights the excellent design of the unfunded first pillar in Switzerland which has achieved near universal coverage. However, it also points out that an ageing population and the high and increasing number of disabled pensioners mean that the dependency system ratio is gradually deteriorating.
Although public pension benefits are modest – between 40% and 20% of average earnings – participation in the second pillar pension funds is compulsory for all workers in independent employment whose annual income exceeds a minimum level, and currently covers 3.1m workers, out of a total of 4.3m active population in Switzerland. The survey reports as the main weaknesses of the Swiss second pillar its lack of transparency, the generally low returns and the use of standardised annuity products. “Consistent, timely and reliable data on the size and structure of private pension funds, the asset composition of their portfolios and their performance in terms of investment returns and operating costs are conspicuous by their absence,” the report says.
Surprisingly, the study found that workers and the public seem to be unconcerned about low returns. The reasons given for this are the fact that workers covered by large company plans may belong to defined benefit (DB) plans , where the performance risk is assumed by employers and also because of the use of the concept of ‘co-ordinated earning’, low income workers may rely only to a limited extent on the private pension for their old age, thus meaning they are little affected by low returns.
The only strong criticisms of the Swiss pension system are related to vesting and portability rules and the unequal treatment of working wives and single people. The report highlights that both of these issues have been addressed in recent years.
The study also analyses the move to defined contribution (DC) plans. “The conversion from DB to DC plans is continuing, with the pension fund of the federal government and city of Zurich being the latest to announce this,” the report says.
A separate report on pension funds owned by public institutions in Switzerland conducted by Swissca Portfolio Management and Prevista Anlagestiftung in co-operation with the Swiss Association of Pension Funds, also highlights the fact that, although DB is the dominant organisational system among the public sector pension funds, some of them have already switched to a DC model and this trend is set to continue. Reasons given for this included the greater transparency of DC plans and the stability in terms of contribution payments. These issues where also selected by the World Bank/OECD paper as the most important challenges for the future. “The main issues to be addressed for the future of the Swiss second pillar will be to improve transparency and supervision, which implies and encouragement of consolidation in the sector, and to enhance its investment performance,” the report says. “There seems to be growing pressure for further relaxation of investment rules and for giving employees greater choice in selecting pension funds and directing their investments.”