Switzerland has been teetering on the brink of a so called ‘pensions crisis’ for several months. When the government lowered the minimum guaranteed interest rate paid on occupational pension schemes from 4% to 3.25%, one sensed that all was not well with Switzerland’s second pillar system.
With an increasing number of Swiss schemes becoming underfunded and no end to the bear market in sight, concerns over the welfare of Switzerland’s retirement systems have been deepening, and public criticisms have become more audible. Although Switzerland’s trade unions are opposed, it has become apparent that the 0.75% cut to the guaranteed minimum interest rate is insufficient, and no longer able to avoid the suggestion that the system may be in serious danger, the Swiss government has called for an “emergency review.” Two experts have been commissioned, and an interdepartmental working group established to carry out an enquiry into the second pillar system over the next two years, and once more the guaranteed minimum interest rate will be put under the knife, instilling panic into the hearts of Swiss savers, but consultants are convinced that the system is sturdy enough to avoid a crisis.
When it was introduced in 1985, the guaranteed minimum interest rate of 4% was the cornerstone of the Swiss mandatory supplementary pensions system. Explains Mike McShee, managing director, at consultant Pendia Associates: “When the 4% figure was decided upon back in 1985, it was deemed appropriate. In those days you could be sound asleep and achieve a 4% return.” Federal bonds, upon which Swiss pension funds relied, were able to provide most, if not all, of the 4% return.
In the early 1990s an increasing number of investment funds started to reassess their investment strategy. Lower inflation started to depress net bond yields, and investors began to accept the proposition that, in the long-run, better returns could be achieved by investing in equities. Nobody was, of course, reckoning on the longest bear market seen in 100 years to be waiting round the corner. Although the Swiss pension system didn’t, and still does not, have as a high percentage invested in equities as many of its European counterparts, the country, so frequently regarded as “an island” for its ability to remain autonomous from much of the outside world, has found itself facing the same problem as pension funds worldwide – there simply is not enough money.
It is now estimated that between 30% and 50% of Switzerland’s second pillar schemes are underfunded, compared to just 6% at the end of 2001. If some argued that a 4% return looked achievable last year, then they certainly will not now. Even the recent cut to 3.25% provides no relief to many insurers and pension schemes. The latest figures show that in the first half of 2002 alone, Swiss pension funds produced a median return of –5.0%, according to figures from ASIP/Watson Wyatt.
Just how Switzerland’s pension funds ended up so underfunded without warning is of some concern. As part of the review, the issue of supervision will be examined - a move welcomed with open arms by much of the industry. Says Michael Brandenberger of Complementa: “The Federal Office of Social Security is too slow in recognising the state of pension funds – they can be a year behind, which is a very dangerous thing.”
Adds Werner Nussbaum, an independent legal expert for pension systems, and director of Innovation Second Pillar: “In Switzerland, a modification to the scope of the supervisory authorities (at least at a federal level) is an absolute must. Most of the supervisory authorities are not sufficiently sophisticated to resolve the problems of pension funds, let alone in the current environment.”

For those Swiss pension schemes only slightly underfunded, a slight change in investment strategy may be sufficient to make up for the shortfall. Explains McShee: “If you can earn 5% in the future, with the 4% guaranteed minimum interest rate cut back to 3.25% the gap is only 1.75%, and a deficit of 10% is achievable to fill.” For funds only 80% funded, a change in investment strategy is not a solution. Says McShee: “If you are a Swiss investor, then you find yourself looking at a list of bond yields and seeing figures of 1.8% or 2.2%. If you want to take away the risk produced by equities and switch to safe investments, then you are locking yourself in to a 2% return. For a fund only 80% funded there is no prospect of earning away that deficit. If you were a mature business with a lot of retired people you would have to tell everyone their retirement would be cut. So if you take the safe route, you will die slowly. If you stick with equities you could do worse, but you have a chance at survival.”
For these funds, a further lowering of the guaranteed minimum interest rate offers the only opportunity for a light at the end of the tunnel. Prior to decreasing the rate to 3.25%, a figure of 3% was bandied about, but the public outcry that ensued was discouraging. If equity market performance does not pick up in 2003, the measure may have to addressed again. Carl Helbling, pensions expert, and professor at the University of Zurich, believes it could be reduced to as low a rate as 2.5%. More recently, however, a different idea has taken shape, in the form of a variable guaranteed minimum interest rate.
Consultants are more enthused about this new option, but dubious as to how it will be implemented. Says McShee: “Somehow, the rate has to accommodate changes in the market place, but the authorities are struggling a little as to how the rate should vary. Yes, there should be some form of guaranteed interest rate, but what do you do when you have a stock market that keeps returning minus 20?.” A serious and complicated issue, the Swiss Federal Office of Social Security, the Home Office, and commissioned experts will all be examining the guaranteed minimum interest rate throughout the course of 2003. The final decision is expected to be announced in October, following talks with the social partners.
The description of the review as an “emergency” is a little over-exaggerated believes the consultant community. While the in-depth analysis of the guaranteed minimum interest rate planned is warmly welcomed, the suggestion that Switzerland is having a “pension crisis” is discarded.
Says John Anthony of consultants Watson Wyatt: “We believe there is still ample scope to run plans on a sound basis, and that the system is not in as much need of repair as is often cited. Changes in some aspects of the law would be welcome – it would certainly be helpful to allow true defined contribution schemes without investment guarantees. The review being carried out by the government is potentially far-reaching, and the nature of the questions being looked at is fundamental. However, one is certainly justified in questioning whether the system itself is broken, or whether it is not just an overreaction to the market downturn.”
McShee agrees. “The Swiss pension system is working very well, and better than most other countries’ systems.” He believes that, in reality, there is not a crisis “We just thought it was a system in which there was no risk – but actually there is.”

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