Insurers' moves harsh wake-up call for Swiss pensions
For the second year in a row, Swiss pension plan members are being jolted from their easy-chairs by the impact of the bear market of the last three years.
Eyebrows had already raised around the Cantons and beyond last year when the Swiss authorities cut the minimum income guarantee for pension funds from its historical 4% level to 3.25% from January this year.
Few experts, however, believed this cut would be sufficient: pointing out that the sums didn’t tally.
With the criteria for determining the minimum interest rate based on returns of 10-year Swiss government bonds (currently hovering around 2.2%) and returns on investments (negative in recent years), where would the guarantee come from?
As a result, the Swiss Federal Office for Social Security recommended a reduction of the guarantee to 2% – a cut that looks certain to be ratified this summer for implementation from January 2004.
On top of that, Swiss pension funds in serious funding trouble may be exempt from the interest guarantee altogether. Suggestions are that around a third of Swiss funds could be below 80% funded and many are already cutting contribution rates in a bid to rebuild technical solvency ratios.
While the government seeks to ensure that the well-respected Swiss second pillar pensions system bends before it breaks, Swiss insurance companies have also taken the opportunity to protect their own ravaged balance sheets by upping contribution requirements and dropping their pension conversion rates for the non-mandatory portion of the second pillar.
Credit Suisse owned Winterthur announced plans in June to reduce its annuity transfer level from 7.2% to around 5.84% for males aged 65, and 5.45% for females aged 62 for account balances above the mandatory minimum under Swiss law, with the reduction to take effect from 1 January next.
For some savers this came as a nasty surprise with the prospect of projected retirement income being hit to the tune of around 25% for men and 33% for women.
Needless to say such pension cost-cutting measures by government and industry alike are not being taken lying down.
Swiss unions, already piqued by lower pension contribution rates, have responded brazenly to the fact that poorly performing funds might now be able to shirk their guarantees.
Furthermore, an association to protect the small and medium sized companies most affected by the actions of the Swiss insurers was recently established in Bern. The ‘Schutzgemeinschaft für KMU’, headed by Swiss entrepreneur Otto Ineichen, says it will try to stop both Winterthur and Zurich from cutting annuity conversion rates, possibly through the courts, claiming that exorbitant premium hikes and annuity cuts in company pensions could threaten the very existence of many firms.
Such dissatisfaction has not been lost on the government, which set up two expert commissions last month to analyse any structural problems within the country’s occupational pension system and report back by the year end.
The first, headed up by Hans Michael Riemer, professor of private law at the University of Zurich, will look at whether the legal structure for pension funds is appropriate today – particularly regarding divergences in the law applicable to the collective pension foundations of insurers and banks.
The second, headed up by Professor Juerg Bruehwiler, lecturer of work, social security and private law at the University of Bern, is examining the supervision of pension funds, with a focus on investment policy.
While few believe that the long-admired equity and security of the Swiss pension system is in serious danger, there is little doubt that the harsh wake-up call to pension schemes and members alike has altered perceptions of a system held up as a shining example.
But as one market commentator, points out: “The only problem was that the Swiss structure lived for so long on the assumption that you could do investment while you were sleeping!”