Switzerland: And now for the details
It was always going to be a political decision – first the government decided which proposals to include in the major reform package Altersvorsorge 2020 (AV2020), and now it remains to be seen which will make it into the draft bill due to be presented to parliament by the year end. The Swiss pension industry is anxiously awaiting the outcome of the political debates over the next months.
In the 2011 elections, the centre-right Swiss people’s party (SVP) became the strongest party in the lower house of parliament with slight losses but still holding one-third of the seats. However, it has only one representative in the seven-member government. The second strongest party, the Social Democrats (SP), has two ministers and 20% of the seats in parliament.
The SVP is one of the harshest critics of the major pension reform AV2020, which encompasses the first and second pillars. The party, like the Swiss employer’s association, criticises the package as a “cluttered mega-reform” and particularly dismisses the proposal to increase sales tax to shore up the finances of the AHV/AVS, the first-pillar fund. The party is positioning itself against its natural allies, the employer associations, which have signalled a willingness to accept an increase of the sales tax.
At a glance
• The Altersvorsorge 2020 reform package will become draft legislation by the end of 2014.
• Experts and politicians are still at loggerheads over the conversion rate, minimum interest rate and VAT.
• Pensions are set to remain a political issue.
According to statistics published by the Swiss interior ministry, there are major projected outflows from the AHV/AVS between 2020 and 2030, when a large proportion of Swiss people is forecast to retire.
The calculations show that the fund will need CHF2-9bn (€1.6-7.4bn) in additional funding, which equals a sales tax increase of 50-250bps, a rise in salary contributions to the first pillar by up to 200 basis points or an increase of the statutory retirement age by 3.2 years. Not all of these suggestions made it into the AV2020 reform package – any increase of the retirement age was limited to raising that of women at 64 to equal that of men at 65.
This is one of the two points of the reform the centre-left SP is criticising. It says it will only accept an increase of the retirement age for women once economic and earning parity is achieved. The SVP, on the other hand, fully supports further increases to the retirement age of both genders.
A further point that has been criticised by the SP – but fully accepted by the SVP – is the cut in the conversion rate, which is the subject of the most heated debates in the pension industry. The so-called Mindestumwandlungssatz is used to calculate pension payouts from accrued assets. If the Swiss actuarial society gets its way, the rate might fall below the 6% mark which – as many experts agree – would be the correct rate given the low interest rate environment. But many believe such a major cut is not politically possible (see panel).
For the pension industry the devil might also prove to be in the detail of the reform and several experts already are at loggerheads over figures and potential phrasing.
In its statement on AV2020, the Swiss actuarial society (SVA) warns that the compensatory measures suggested to soften the blow of the cut in the conversion rate will “lead to massive increases in benefits” for some people and generate “considerably higher costs”.
According to the reform plans, the rate at which salaries are discounted to calculate contributions into the second pillar is to be slashed. The Koordinationsabzug is used to co-ordinate expected payments from the first pillar and those from the second pillar needed to earn 60% of final salary before retirement. For several years, there have been debates on whether a higher compensation rate might be fairer for low earners.
However, according to calculations by the SVA, slashing the Koordinationsabzug will increase costs in the second pillar by up to 50%.
The Swiss pension fund association ASIP, welcomes this reform proposal as a necessary improvement for people with lower incomes. To simplify calculations, the association suggests doing away with the Koordinationsabzug altogether and instead capping payouts from the second pillar to a certain maximum.
ASIP also challenges planned changes to the method in which the second pillar minimum interest is calculated. Currently, the minimum rate is set at the end of a year for the next based on bond yields. The government wants to change this to an ex-post calculation based on actual returns in pension fund portfolios for the year in which the minimum rate is be achieved.
However, ASIP argues that this change does not add value for pension funds and their members and that Pensionskassen need to know the rules of the game in advance.
Insurers are against a proposal to raise the share of profit from occupational pensions business that they have to return to customers, which is set to be raised from 90% to 92%, or even 94%. Urs Berger, president of the Swiss insurers association SVV, warned in a recent interview that this would make little sense as it would result in a higher guarantee promise, which in turn would “force insurers into a much more defensive investment strategy with lower returns”.
The beef over 40 basis points
The minimum conversion rate, Mindestumwandlungssatz in German, is the interest rate used to calculate pension payouts from accrued assets. This rather technical element of pensions policy has been the subject of the most heated debates in Swiss pensions over the past years and reached an unheard of level of public attention when a referendum took place in spring 2010 to cut it from 6.8% to 6.4%. The proposal was rejected but now both government and pension experts are trying to push ahead with an even more ambitious agenda to cut it. If this fails, some Pensionskassen might have to transfer assets from active members to retirees, given that accrued benefits remain untouchable under Swiss law.
Although the Swiss pension fund association ASIP agrees with the government’s plan to lower the conversion rate to 6%, Swiss actuaries consider this still too high. The Swiss actuarial society SAV noted in a press release that a rate of 5.6% would be more justifiable.
It cites the largest Swiss pension fund, Publica, which will be lowering its conversion rate to 5.65% from 2015, a move similar to that of other pension funds managing above mandatory contributions. These funds can chose a rate below the legal minimum as long as they can guarantee this rate for the mandatory contributions they manage. Smaller pension funds into which employers are only paying the mandatory minimum do not have that option.
On average, the conversion rate in Swiss Pensionskassen stands at around 6.5%, which is below the legal minimum of 6.8%, which became effective at the beginning of this year. But the rate continues to fall, along with technical parameters like the discount rate (technischer Zins), which according to calculations by the Swiss consultancy PPC Metrics stood at around 3.2% on average in 2012. The lowest in the sample was already well below 2.5% while, in 2010, the absolute lowest was 2%.
The government has now commissioned a study into effects and losses for pensioners from a cut in the conversion rate. The final report on the findings is to be published by the end of November.
Other reform proposals have been left out of the AV2020, such as the introduction of life-cycle schemes or 1e-plans as they are known in Switzerland, after the legal paragraph in the law on investments of Pensionskassen that mentions this choice of risk profile. Jürg Stahl, a deputy in the lower house of parliament, put forward a motion to simplify the creation of these plans five years ago, yet the government only recently decided to draft a bill.
“The Stahl motion is only progressing at a snail’s pace at the moment and it can only have been a political decision not to include it in the Altersvorsorge 2020, notes Jérôme Cosandey of the think tank Avenir Suisse. He adds that the government might oppose granting people greater choice while at the same time transferring some of the risks. But as long as the motion is not voted through, most providers will not offer such products given that the risk of a bear market is still borne by the pension funds and buffers in the schemes must be increased significantly.
So the future of the Swiss second pillar will be shaped in political debates but there are several voices from the pensions industry calling for a de-politisation of certain topics regarding occupational pensions. They would like to see the decision on the conversion and the minimum interest rate to be taken out of the political arena. This might happen with the conservative SVP in power since it supports these steps and would even cut the AHV/AVS’s dependence on federal contributions, leaving it to be financed by wage-related income only. The next elections for the Bundesrat as well as the parliament in Switzerland are scheduled for 2015.