It has been one of the hot issues of the market and the government finally decided to do something about it. The minimum interest rate for occupational pensions in Switzerland of 4% has been seen as a huge legal constraint that was making asset manager and insurers’ lives very difficult and forcing some of the providers to pull out of the business.
In July, the federal government decided to lower this rate from 4% to 3%, a measure that was welcomed by asset managers but widely criticised by some pension funds, politicians and workers associations.
“This 4% minimum return guarantee has, for quite some time, been the most debated issue in the market,” says Udo von Werne, marketing manager at Pictet Asset Management in Geneva. “Especially in an environment like this of low or even negative absolute returns and shrinking reserves, meeting this target has become more and more difficult.”
Many where asking the government to review this legal constraint and make it more flexible taking into account the long-term strategies of the pension funds and not short-term considerations. The new political decision of reducing this rate, that will come into force from next month, is aimed to stop the depletion of reserves and will be monitored regularly allowing the government to raise or lower the level when necessary.
From those who see this measure as a danger for the future of guaranteed pensions in the country, the reaction has been negative. The Swiss Pension Fund Association (ASIP) described the government’s move as “over-hasty and inappropriate”. The ASIP considers that the government should have waited until the federal office for social security (BSV) presented the results of its enquiry into possible changes to the rate before taking a decision. “Pension fund investments are typically long-term, so that for the evaluation an accordingly longer time horizon for their net yield is necessary,” ASIP said in a statement. “Therefore, it is not to be countenanced that the minimum interest rate should be changed in such a manner at short notice.”
In Zurich, Urs Baltensweiler, a member of the management committee of Julius Bär says: “The pressure that the 4% rate has had on the industry in the recent past has been huge and many agreed that some changes in regulation were needed.” He adds: “All that pressure was affecting asset allocation and could lead to a very difficult situation in the market. If this disappointing performance continues, pension funds will be forced to move away from equities and this could have a very negative impact on the market.”
Even if this government proposal might not be the solution to the problem, the truth is that the guarantee rate has been revised. This should be seen as step in the right direction that will allow regulation to adapt to market conditions. “The fact that you have to achieve a certain interest rate every year is promoting short-term strategies and this is not a sort-term business,” says Paul Winiger, manager at Zurich-based investment house Swissca. “These legal constraints will, more and more, force investors to focus on risk-free assets and this is not good because they will never get the best returns for the scheme members.”
The general view is that it is not about lowering the rate a point or two but more about how the system itself operates and the difficulties of operating under this framework. However, Swiss insurers are happy with the decision that has already benefited their business. When the announcement came, shares in Swiss Life rose by a very significant 15%. We will have to wait and see.