Swiss pension funds are miscalculating their members’ longevity by almost 20 days a year, Towers Watson has warned.
According to the consultancy’s calculations, Swiss longevity is increasing by 1.74 months per year – not 1.1 months, as most mortality tables currently estimate.
This means a woman aged 65 in 2030, for example, might live for another 32.2 years instead of 25.3 years.
Peter Zanella, head of retirement solutions at Towers Watson Zurich, said: “For the delta of almost seven years in this example, Pensionskassen do not have enough accrued assets.”
He added that this would lead to further re-distributions of assets from active to retired members, as pension payouts that are already running cannot be adjusted in Switzerland.
Zanella said the “mistake” had not revealed itself to date because good returns had helped fill pension funds’ buffers.
But now, in a low interest and low-yield environment, he said there was “urgent need for action” – both from pension funds and politicians.
A recent pension fund survey by Aon Hewitt found that most Swiss pension funds are still using so-called ‘period mortality tables’, where an unchanging increase in longevity is assumed.
At the presentation of the study in Zurich, Marianne Frei, actuarial expert at the consultancy, said only a handful of schemes were using generation mortality tables, allowing for changes in longevity assumptions.
Ljudmila Bertschi, pension fund expert at Towers Watson, urged pension funds to adjust their longevity assumptions to better reflect the make-up of their membership.
She pointed out that highly qualified males, for example, which have higher pension benefits on average, also had a 20% lower mortality rate than the average Swiss male.
Towers Watson argued that reducing the conversion rate and introducing flexible pension payouts would initially burden active members.
It has therefore called on the government and pension funds to allow a more flexible approach to asset allocation, enabling a ‘dynamic risk budgeting’ that includes longevity risk.
In addition, contributions to pension systems will have to increase to cover the gap, it said.