The Swiss occupational pension scheme Stiftung Auffangeinrichtung BVG, or Foundation Institution Suppletive LPP, is seeking parliamentary approval for its request to open a non-interest bearing account that will help fend off the impact of negative interest rates, the impact of the COVID-19 pandemic, and potentially rising unemployment.
“We are relieved that the Federal Council has accepted our request for a non-interest bearing account and we hope that parliament will approve the proposed amendment,” the Stiftung told IPE in a statement.
The institution, supported by the social partners, is required to accept all vested benefits from pension funds if employees cannot transfer them to another fund after the termination of an employment position.
In its draft law, which would reform the second pillar, the Federal Council foresees a temporary deployment of vested benefits to the Federal Finance Administration, or Eidgenössischen Finanzverwaltung (EFV), worth up to CHF10bn (€9.3bn), without interest rates, if the funding ratio of the Stiftung Auffangeinrichtung BVG falls below 105%.
Once approval is granted, the Stiftung can deposit the money in the new fund for three years, a buffer period to find a long-term solution to its structural problems.
“The long-term risk of underfunding becomes very problematic because vested benefits cannot be restructured with negative interest rates,” the Stiftung added in the statement.
At the end of May, the funding ratio for Stiftung Auffangeinrichtung BVG stood at 105.85%, down from 108.7% at the end of 2019. In March, the coverage ratio fell to 101.6%.
The impact of the COVID-19 pandemic on the stock exchanges, negative interest rates adopted by the Swiss National Bank, and the obligation to guarantee nominal value of the vested benefits are taking a toll on the Stiftung.
The institution believes that corrections in financial markets, including the one triggered by the coronavirus pandemic, offer more attractive investment opportunities.
It tries to seize such opportunities in order to mitigate the result of the investments with negative interest rates, it said, adding that the situation remains challenging, and a new decline in prices on stock exchanges is a real, threatening scenario.
Based on the current investment strategy, the foundation’s board is forced to take immediate measures that reduce risk, including a pro-cyclical sale of risky assets (stocks, bonds) and increase liquidity, the government wrote in its message to reform the law.
The Stiftung could see a significant inflow of funds because of unemployment, which in turn can lead to a lower funding ratio.
“In the medium term, we expect an even stronger inflow of vested benefits due to rising unemployment. For occupational pensions, we anticipate an increase in the bankruptcies of our affiliated employers,” the institution said.
In times of negative interest rates, the guarantees for provisions, capital preservation, vested benefits accounts and a statutory conversion rate of 6.8%, is a challenge that can hardly be mastered, it said.
In the past, the institution was able to compensate the negative interest on its liquid funds through the returns on other asset classes, and even slightly increase the coverage ratio for vested benefits, from 108% in 2014 to 108.7% in 2019.
For Lukas Müller-Brunner, member of the executive board responsible for social policy and social insurance at the Swiss Employers’ Association (SAV), the foundation is in an “almost unsolvable dilemma” caused by the obligation to accept money and the ban to charge negative interest rates.
“In this respect, I think it is right that the legislator intervenes, and at least temporarily grants the institution an alternative,” he told IPE.
“In this respect, I think it is right that the legislator intervenes, and at least temporarily grants the institution an alternative”
Lukas Müller-Brunner, Swiss Employers’ Association (SAV)
But the real problems are “structural”, he said, explaining that the inability to control the inflow of money from those insured who immediately join a new pension fund generate an “enormous” volume of capital with guarantee that leads to costs no longer sustainable in the current interest rate environment.
The interest of financial service providers in vested benefits is fading due to negative interest rates, he added.
The Stiftung Auffangeinrichtung BVG received around CHF1.38bn in vested benefits in 2019. In 2018, the inflow was just under CHF800m, while vested benefits in banks decreased in 2018 by CHF474m.
“Interest rates will hardly improve in the foreseeable future, this means that the structural problems at the institution will continue to exist,” Müller-Brunner said.
“The current policy approach makes sense in the short term, but does not solve any fundamental problems, and here I see the greatest danger: that one continues to muddle through without discussing the actual causes. In my opinion, there is no way around this,” he said.