FEATURE: Olivier Deprez on Switzerland's 'crisis'
Switzerland got its first inkling of a pensions crisis earlier this year when the government announced that it planned to lower the minimum guaranteed interest rate paid on occupational pensions schemes from 4% to 3%.
The move, which was a response to the steep fall in equity prices and its impact on insurers and pension fund reserves, provoked a furious reaction from the public.
There were claims by the SGB, Switzerland’s association of trade unions, that people would being robbed of a quarter of their pension entitlement. There were even fears that the stability of Switzerland’s entire second pillar system was threatened.
However, Swiss pension fund experts have generally dismissed such fears as irrational. Olivier Deprez, independent pension fund expert based in Zurich, says that fears of a collapse of the second pillar system are unnecessarily apocalyptic.
“It’s not in danger. That’s an exaggeration. The greatest danger to the pension system will be if we keep the minimum interest rate too high,” he says.
Deprez, who represents the Swiss chamber of pension fund experts on the BVG-Kommission, the body responsible for reviewing the second pillar system, says that people are ignoring the fact that inflation has fallen far more than the minimum interest rate.
“The original model for setting the minimum interest rate guarantee system was that the inflation rate should be exactly equal to the interest rate. Since 1985 the interest rate has stayed at 4% but the inflation rate has grown smaller, to1% or less This is good news for people and it’s not very important what the absolute interest rate is. What is important is the difference between the guaranteed minimum interest rate and inflation.
“People who get 3% per cent interest are much better off with price increases of 1% than people who get 4% when price increases are 4%. What matters is not how many Swiss francs a pension pays but what the pension will buy”.
He says the decision of the Bundesrat to raise the proposed new minimum guaranteed interest rate from 3% to 3.25, following the public outcry, was ill-advised. “It gives the impression that the Bundesrat is not sure of its facts and does little to calm the situation.”
Under the new proposals the Bundesrat will have to review the minimum interest rate at least every two years, taking into account the net yield of federal government bonds and other investments. The Federal Office for Social Security (BSV) which already reviews the financial position of pension funds at the end of each year will supply the data for this.
Deprez says this is good as far as it goes, but thinks that it does not go far enough: “It’s a good idea to have a regular review but I would prefer a stricter formula and I think perhaps it should be done throughout the year. We proposed this to the government but they told us that it would mean a change in the law to do this and they were unwilling to do that.
“It would be a good idea to have different minimum guaranteed rates for different funds but for this you must also change the law.”
The row over the minimum interest rate guarantee has at least focused people’s attention on pensions, Deprez says, and this is to be welcomed.
“We must discuss these issues. If we don’t we are going to have a lot of problems. The future of the Swiss second pillar is not in any danger But we must take care of the system. We are now beginning to realise that the funded system is not the only solution - we must have both.”
Deprez says the fierce public reaction to the proposal to lower the minimum rate shows there is considerable public uncertainty and distrust about the way the second pillar schemes are managed. “This distrust can be countered only by greater transparency.”
He also wants to see a rapid lowering of the transformation rate, the rate for calculating pensions. Today this rate stands at 7.2%. This means that a someone who has accumulated SFr100,000 can expect a pension of SFr 7,200 a year. The BVG Review of the second pillar pensions proposes reducing this to 6.8%.
“This is absolutely essential, because longevity in our society is growing greater.”