The city of Lucerne is reviewing measures to fund its Pensionskasse which has been hit by an aging population and fluctuations in capital markets.
The city council is proposing a reduction to the conversion rate used to calculate pension pay-outs – Umwandlungssatz – from the current 5.7% to 5%.
The Pensionskasse of the city of Lucerne (PKSL) is in fact loosing CHF9.3m (€9.6m) a year because of a high conversion rate, increased life expectancy and capital markets volatility. The current conversion rate can no longer be funded, the city council said in a statement.
Annual losses also mean that a redistribution is taking place between pension funds’ active members and pensioners.
PKSL and the city of Lucerne have put forward measures to compensate members for a reduction in the conversion rate, and in turn lower pension benefits, on the one hand increasing member remuneration, and on the other introducing credits on the accrued capital for retirement.
Contrary to the last conversion rate reduction in 2017, PKSL can this time around fund credits worth CHF71.2m, with reserves set aside at the end of 2021, the city of Lucerne said.
The city council wants to redesign not only how to fund the Pensionskasse Stadt Luzern, but also the Pensionskasse’s governance rules and the competencies between the city and PKSL.
The legal framework on funding the pension fund, benefits and governance stems from the reform of the second pillar pension system in 2010.
In the meantime, the city council said, the governance of public pension funds has changed, therefore adjustments are necessary so that the rules on the tasks and the authority meet the requirements and best practice set by law.
The parliament of the city of Lucerne – Grosser Stadtrat – is expected to discuss proposals put forward by the city council on 27 October.
PKSL has over 3,700 active members and around 2,300 members who already receive pension benefits. In addition to the employee of the city of Lucerne, other employers have joined the pension fund, including those employed in independent companies (ewl, vbl and Viva Luzern).
The Pensionskasse has total assets under management of CHF1.67bn as of June this year, down from CHF1.82bn at the end of last year, invested mostly in fixed income (CHF505.7m), while CHF470m is invested in equities, CHF558m in real estate, and CHF137.7m in alternative investments.
The scheme has recorded an average return over the last 10 years of 6%. It has already gone through restructuring during the financial crisis in 2008, when its funding ratio plunged to 85.3%. PKSL cut its conversion rate in 2017 from 6.2% to 5.7%.