Consultancy floats Swiss 'time-limited' pension pay-out model
Swiss pensioners should be given the option to draw down higher levels of pension income on a time-limited basis, according to Willis Towers Watson.
The consultancy’s model is for the portion of pension savings capital that exceeds the minimum cover prescribed by law.
It proposed the model in response to falling conversion rates, which are used to calculate how much pensioners can take as income from their pensions every year. It was pitched as a means of alleviating pressure on pension providers and offering flexibility and fairness for pensioners.
Swiss pension providers have been cutting conversion rates in response to demographic change, increased life expectancy, and low interest rates. At many pension funds the rate is 5% or less for the overall plan.
“The lower the conversion rate, the higher the risk a pensioner will not be able to use up the capital s/he has accrued,” Willis Towers Watson said.
The consultancy added that pension providers and scheme members close to retirement have to assess life expectancy and future yields over a 25 or 30-year timeframe. The longer the timeframe for which such estimates are needed, the higher the probability that the assumptions used will not materialise.
Under the model proposed by the consultancy, a pensioner would choose for how long he or she wished to receive a pension – for example 15, 20, or 25 years.
Once this period has lapsed the pensioner would receive the accumulated interest as a final payment.
Willis Towers Watson said this model would increase pension funds’ ability to plan and minimise interest rate risk and longevity risk.
Pensioners would benefit because their accrued capital was guaranteed to be paid out, instead of going back to the fund.
If the pensioner died before the end of the chosen time period, the remaining retirement savings capital accrued above the mandatory level would be paid out to the surviving relatives. Under the current approach the rest of the savings capital stays with the pension fund, leading to departure gains.
Taking a lump sum payment instead of a regular pension would still be an option under the consultancy’s model.
According to Willis Towers Watson, more than 50% of future Swiss pensioners could benefit from increased flexibility in the way they draw down their accrued above-mandatory pension without this affecting their base pension provision.
Christian Heiniger, pension fund expert at Willis Towers Watson, said: “Conversion rates have been falling continuously in [recent] years and the trend continues unabated. The lower the conversion rate the more attractive the model of time-limited pensions with a refund guarantee becomes.”
The consultancy’s proposal comes as various industry associations in Switzerland are positioning themselves either for or against a comprehensive pension reform programme that will be put to a referendum in September.