The Swiss federal council will have to strike a difficult balance in the best interest of pension funds and the insured regarding the upcoming decision on the minimum interest rate to apply on pension assets in 2021.
The federal commission for occupational pensions, BVG-Kommission, has recommended that the government lowers the minimum interest rate for occupational pensions next year from the current 1% to 0.75%.
The minimum interest rate applies to pension assets of the insured already enrolled in the first pillar system AHV (Alters- und Hinterlassenenversicherung) with a minimum annual wage of CHF21,330 (€19,631) – the so-called mandatory part of occupational pensions, or BVG-Obligatorium.
“I don’t know if the federal council will accept our suggestion. It will depend at the end of October on the interest rate situation,” Christine Egerszegi-Obrist, the president of the occupational pension commission, told IPE.
The BVG-Kommission has decided to suggest a minimum interest rate of 0.75% following the impact of the coronavirus crisis that led several Pensionskassen to ease interest rates granted, Egerszegi-Obrist said.
“We don’t know what kind of a framework this will actually have an impact on,” she said.
Although the commission has suggested 0.75%, the federal council may look at whether the situation will improve by bringing the minimum interest rate to 1%, Egerszegi-Obrist added, noting that the COVID-19 crisis is not yet overcome.
It is difficult to apply a minimum interest rate of 1% if the proportion of pension funds that have relaxed interest rates is high, she added.
The Swiss pension fund association ASIP has called for a minimum interest of up to 0.5%, its managing director Hanspeter Konrad told IPE.
The minimum interest rate is determined every year, with the decisive factors relying on the progress of returns for government bonds, equities, and real estate.
The commission calculates the minimum interest rate based on a formula that takes into account certain legal requirements – this year it resulted in a lower value at the end of July.
Other factors include taking into account whether pension funds can afford the interest rate in light of the returns that they are able to generate on the equity market.
“ASIP has campaigned for years for the use of a formula as a rule. The current formula results in values well below 1% as minimum interest rate,” Konrad added.
The level of interest rates has decreased further year-on-year, while the financial situation of most pension funds has deteriorated compared to the end of 2019, despite a partial recovery after the sharp price slump in spring. Konrad added.
“The pandemic should serve as a warning to us about how important it is to think ahead and take appropriate precautions,” he continued.
“The pandemic should serve as a warning to us about how important it is to think ahead and take appropriate precautions”
Hanspeter Konrad, ASIP managing director
In Its recommendation, the BVG-Kommission noted that pension funds can decide to overstep its suggestion of the minimum interest rate of 0.75%, if the financial situation allows it.
But underlines simultaneously that pension schemes responsible only for the compulsory part of occupational pensions do not have the margin to up interest rates as they suffer from high conversion rates used to calculate pension payouts from accrued assets upon retirement, or Umwandlungssatz (UWS).
Konrad said that interest rates and conversion rates that are of a high minimum level “do not fit together”.
High minimum interest rates increase the pressure on the financial situation of pension funds in view of the low interest rate environment and declining technical interest rates, he explained.
BVG-Kommission’s recommendation will likely have an impact on the ability of pension funds to achieve the desired level of returns.