The Swiss second pillar has become too complex and lost sight of its original principle of employer patronage towards employees
According to article 113 of the federal constitution (Bundesverfassung) both the first pillar AHV as well as the second pillar BVG have to guarantee “the continuation at an adequate level of the usual living standard a person has become accustomed to”. Originally, lawmakers had assumed a replacement rate of 60% of an annual income of CHF84,600 (€73,500), the income at which it is possible to get the highest state pension. The AHV, together with supplementary benefits (Ergänzungsleistungen), covered the subsistence minimum and the mandatory part (Obligatorium) of the second pillar ensured the adequacy of the pension payout.
However, various second pillar elements are determined from the outside, that is by politicians, leading to distortions. A simplification of the regulations for the second pillar would return trust to the system which was lost in its complexity.
As part of an overhaul of Swiss Pensionskassen, the influence the state should be reduced to a minimum. The government should only determine a replacement rate it wants to achieve in the first pillar and the mandatory aspect of the second pillar. It would be completely up to the Pensionskassen then to ensure this legal minimum, without political interference.
Free from the regulations on asset allocation, on a minimum interest in the second pillar and on conversion rates as well as other legal requirements Pensionskassen could then invest more efficiently.
From the higher returns during the accrual phase not only those with higher incomes and contributions would benefit, but also those with lower incomes. Consequently, there will have to be solidarity between the mandatory and the above-mandatory (Überobligatorium) part within a Pensionskasse but this is part of the unique Swiss social system. It is already a reality as many pension funds are applying a lower conversion rate to assets accrued in the above-mandatory part of their portfolio.
For higher incomes in the above-mandatory part a variable pension or other solutions should be allowed to let them profit from capital market rallies. Of course, this would also mean lower pensions in times of weaker returns.
The second pillar is important. But lately complexity and low interest rates have lead to a detachment from employers towards their pension plans. Many have outsourced their pension schemes to multi-employer collective schemes, split off the mandatory part, created special plans for higher incomes (1e plans) and with it their responsibilities for caring about their employees’ pension.
But according to the Swiss constitution the second pillar is part of ensuring a standard of living in retirement. If only the first pillar AHV had to cover the minimum pension level both contributions to this pillar as well as the tax share used to finance it would increase.
An increase in the value-added tax to benefit the AHV would burden lower income households. And this minimum pension would still be lower than one including payments from the second pillar.
If the contributions to the AHV, as well as taxes in general, were raised to ensure sustainable financing of the first pillar, those with higher incomes would feel the increased burden. This is a result of contributions to AHV being unlimited but the pension benefit is limited. Therefore, if only the contributions to the second pillar are increased, everyone would save more for themselves and the pressure on the AHV would be relieved. At the same time, saving in the second pillar better suits modern working conditions.
The volatility of variable pensions in the Überobligatorium would be less of a financial burden both on individuals as well as the state.
The argument against cross-financing within the second pillar is a overused and shortsighted. Ordinary business cycles and higher returns in the future will resume, which means some form of compensation for lower incomes will only need to be found for a single cohort.
Overall it is important that employers renew their responsibility for caring for their employees’ pensions as part of a social system based on solidarity, the basic strength of the Swiss economy.
This is a slightly modified translation by Barbara Ottawa of a comment Werner Hug originally wrote for the Swiss financial newspaper Finanz und Wirtschaft
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Werner Hug: Less complexity, more solidarity