People versus the system
Swiss insurers are claiming that premiums must be increased and pension conversion rates reduced if they are to cope with increasing costs and depreciated reserves. For many Swiss people, this is the last straw in an ongoing “pensions robbery”, and the time has come to fight together, but do they really stand a chance of beating the mighty insurance companies?
Winterthur, the life insurance subsidiary of Credit Suisse, recently announced plans to reduce its rate at which it converts occupational scheme members’ capital into annuity from 7.2% to around 5.835% for males aged 65, and 5.454% for females aged 62. While not alone in its decision to reduce conversion rates, Winterthur has singled itself out by becoming the first to state that present members will be affected – not only future members. Losses could kick in as early as next year, and by reducing the conversion rate, female pensioners could see as much as 33% of their pension cut, and male pensioners 25%.
Winterthur has denounced such figures, stressing that the reduction applies only to extra-mandatory benefits, and that losses would be minimalised to between 7% and 10%, but for the Swiss, Winterthur’s case is the final straw in a series of pensions amendments that have left them feeling robbed. This is not a case of the people versus Winterthur, but the people versus the system – and, as says Colette Nova, of the Swiss central body of unions, “the people are angry, really really angry, and that anger is growing. Just how the state authorities passed Winterthur’s pension model amendment is incomprehensible, and now other insurers are keen to adopt the same model”.
Exactly how the supervisory authority, the Bundesamt für Privatversicherung, passed such an amendment is a valid question. While accepted that conversion rates will have to be reduced as a result of longer longevity and actuarial implications, the figure of 5.835% adopted by Winterthur, and now other Swiss insurers, is much lower and more imminent than the 6.8% figure for mandatory benefits decided by the Swiss department of social security (BSV) to be implemented over the next 10 years. It begs the question, why should the extra-mandatory conversion rate be less than the mandatory conversion rate? And just how Winterthur arrived at the lower figure of 5.835 % for men age 65 is also causing concern. Those opposed believe that the insurers employed statistics that worked in their favour when seeking approval from the Federal office of private insurance. “The data they used was not the most up-to-date. They used mortality statistics taken between 1986 and 1990 and extrapolated these calculations forward, but data from between 1996 and 2000 shows that widows are no longer living as long, and that the age of men and women is not increasing at such a rate as in the 1980s. Will people really live to the age of 125 in 60 or 70 years time?,” asks Werner Hug, of the Schutzgemeinschaft für KMU, the newly-established association to protect small and medium-sized enterprises, headed by Swiss entrepreneur Otto Ineichen. Winterthur claims it has used data that is “more realistic than many other mortality tables”, but there is definitely the sense among people that things just don’t quite add up. Unfortunately with such a lack of transparency within the Swiss insurance sector, there are bound to be unanswered questions.
It is exactly this point that is adding fuel to fire – lack of transparency. “It seems a little odd that the insurance companies are making these changes now, when in 2005, perhaps as early as 2004, they will be required by law to open their books and we will be able to see exactly what these increased costs are of theirs that are leading to higher premiums and lower conversion rates,” says Nova. Sceptics are saying that insurers are merely trying to make some money before having to show their balance sheets. Indeed it is a sad fact that insurers have become a victim of their own lack of transparency. Suspicious minds are jumping to conclusions about the insurance companies – are they as badly off as they say they are? and if so, where did the reserves go?
In response to such gossip, and in its defence, Winterthur insists the new model has “nothing to do with ‘cleaning up’ its books. Says a spokesman: “The introduction of the new model will not have any measurable effect on our books until next year. The goal of introducing the new model is not to clean up Winterthur’s books but rather to make the pension system viable in the long term, realistic, affordable and fair.”
Whatever is or is not hidden within the insurance company books, however, is not the issue at hand. And while some reserve themselves to gossip, the serious fact that there must be another way of coping with increase in life expectancy, or increasing costs, or market losses, rather than reducing pensions and hiking up premiums, is being tackled with care by the Schutzgemeinschaft für KMU, with the backing of the unions and employers.
“We are not against the insurance companies. We just want to work with them to come to bearable solutions,” says Hug.
“The four insurers (Winterthur, Swiss Life, Zurich, Basler) which are either upping premiums and/or lowering conversion rates account for 79% of the market. And around 90% of those covered by them in terms of benefits are small companies. It has been an expensive business in terms of administrative costs for the insurance companies. Although the premiums are high, the small enterprises have been well-served up to now. But the problem is they have no other choice but to accept these new conditions of the insurers. There are only very limited other pension possibilities for them out there,” says Hug.
The lack of competition and free choice goes against Switzerland’s free-enterprise ethos, and is an issue that the Schutzgemeinschaft, employers and unions want to address. Says Nova: “We have to make sure we have more competition and more free choice – insurance companies offer neither. It is important to create real markets, and promote new forms of pension funds which serve the small enterprises. They can’t do it on their own.”
The Schutzgemeinschaft für KMU, established in July will present its case to the Federal appeals commission for the supervision of private insurance, and hopes to delay the introduction of the lower conversion rates and higher tariffs to January 2005, rather than the proposed January 2004. Says Hug: “Our first step is to delay the model, and then we hope to work with new market participants to look at other options, and the issue of more competition to develop solutions that would not have such a major economic impact.”
Peter Wirth, manager at the Vorsorge forum, a collection of Swiss private bankers, insurers, and pensions funds, believes a delay could be possible. “According to a ruling in 1988, conditions by insurers cannot be changed so drastically in such a short period of time. It may be that insurance companies will be forced to adopt their new models over a longer time frame. Perhaps five years.”
Those opposed are convinced that they will be successful in convincing the authorities to delay the model – their conviction lying in the adage of “strength in numbers”. Says Nova: “Yes, the unions will fight, but this time the employers in the form of the Schutzgemeinschaft are also going to fight. It is important to work together. And there are also parliamentary figures who feel what is happening is wrong. The fact that the federal elections are coming up will also help. Members of parliament will be keen to answer the voters’ demands. This is a large coalition of forces.”
But the power of the insurance companies is not to be underestimated. Wirth is less optimistic that the challenge will make a difference. “I’m not confident. There will be a filing against the details of the model, and there may be a delay, but I am sure that the insurance companies will be successful. They will have checked their proposals thoroughly and so will have the authorities.”
The reality is that the Swiss insurance companies have been a law unto themselves for such a long time. Amazingly, proposals by the Swiss department of social security of a reduction in the minimum guaranteed interest rate down to 2%, which now seem unlikely to become law since stockmarkets have picked up, has already been adopted by some insurance companies, including Winterthur.
But the Swiss people will not go down without a fight. “You can’t lower the minimum guaranteed interest rate, and hike up premiums, and lower conversion rates, all in the space of less than six months,” argues Hug. Says Nova: “The first pillar has been attacked, we may see an increase in retirement age, and now we are being robbed by the insurers. It’s all too much. There will be a legal battle and there will be public protests. And this will be a heated autumn.”