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Compensate younger members for subsidising retirees: Swiss consultancy

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Swiss pension funds should consider measures to compensate members that are missing out due to the country’s high minimum conversion rate, according to consultancy c-alm.

Switzerland has twice failed to pass measures lowering the conversion rate, which is used to calculate pension payouts from accrued assets in the mandatory part of the second pillar. The rate is currently 6.8%, but experts have argued that it should be well below 6% given the low interest rate environment and expected weaker investment returns.

“A Pensionskasse should know the history of the separate generations of retirees and allocate free resources to create compensation for those that do not profit,” argued Roger Baumann, partner at c-alm, during a seminar for pension fund representatives organised by the VPS publishing group in Zurich.

He added: “A general approach no longer makes sense as we have seen major differences before and after the crisis.”

In pension funds without surplus assets, the high conversion rate has led to cross-financing of pension payouts from active members’ assets. In addition, the same active members are expected to retire with a lower conversion rate – meaning lower pension payouts.

“One generation financing the other because returns are too low is not intended but necessary to a certain extent because otherwise we would have to amend the conversion rate every year,” Baumann said. 

Instead, he suggested allowing variable pension payouts above a certain minimum income threshold, a subject gaining interest in Switzerland after last year’s move to grant more investment choices and variable pensions for so-called “1e plans” for higher earners.

Baumann emphasised that “solidarity was the spine of the second pillar”, without which supplementary pensions could be organised privately via insurers.

At the VPS conference, Patrick Spuhler, founding partner of pension consultancy Prevanto, said it could make sense to have a different conversion rate for women. Despite the fact that women live longer, they usually “cost less” after they have died as their husbands more often than not have died before them.

“With men, marriage is ‘worse’ for pension funds as they usually have younger wives who are eligible to a widow’s pension,” Spuhler observed.

He cited statistics that showed both married men and women live longer than the average after age 65, but life expectancy has improved the most for divorced retirees.

While delegates at the conference agreed it might not make sense to have different conversion rates for different situations, Spuhler argued that trustees should still “know about solidarities as well as cross-financings happening within a pension plan and manage them”.

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