New reforms to the first and second-pillar are due to be debated in parliament next year and implemented by 2022
- First-pillar bill raises the pension age and VAT
- Second-pillar reforms likely to encounter a rocky road in parliament
- Revised regulation on risk control and governance for multi-employer funds are due by the end of the year
The Swiss federal government took an important step along the tortuous road towards first-pillar pension reform with the publication of draft legislation in August.
The state pension system – known as AHV in German and AVS in French – has a substantial funding deficit and has already been the subject of proposals that were rejected in a referendum in 2017.
The new initiative – officially known as AHV 21/AVS 21 – aims to strengthen the sustainability of the first pillar, while maintaining current levels of pension.
The new text, which contains some of the elements of the previous plan, is expected to be debated in the Federal Assembly next year, with the intention of introducing the changes by 2022.
Proposals include raising the minimum retirement age for women from 64 to 65, the same as for men. This could also be extended to second-pillar occupational pensions.
Further proposals will allow people to choose when they start receiving the state pension – between the ages of 62 and 70 – and to provide incentives to work after the age of 65. Additional funding will be provided by raising the value-added tax (VAT) rate by a maximum of 0.7%.
However, second-pillar (BVG/LPP) pension reform attracted much more intense debate during the summer. Here, the purpose of the reforms is also to achieve financial sustainability in an era of economic challenges, such as an ageing population and historically-low interest rates. The most important provision relates to the minimum conversion rate used to calculate pension entitlement retirement.
The proposal was negotiated by three social partners – two trade unions and the association for employers, SAV/UPS. The centrepiece is the immediate lowering of the minimum conversion rate applicable to the mandatory portion of retirement savings from 6.8% to 6%.
The effect of this would be to lower the level of future pensions. At present, active members are increasingly subsidising retirees because of higher longevity and declining interest rates and asset returns.
To compensate for the proposed lower conversion rate, the social partners have suggested increasing both pensionable salaries and contributions. In addition, it is envisaged that a fixed pension top-up will be paid to future retirees for the next 15 years. The top-up will be between CHF100-200 (€91-182) per month, and financed by a contribution equal to 0.5% of salary, which will be split equally between employer and employee.
OAK agrees new technical interest rate standards
The threat of the Swiss second-pillar regulator (OAK) to set binding standards to determine the technical interest rate – used to value pensioner liabilities – has achieved its goal.
Having announced that the existing guidelines (FRP 4) of the Swiss Chamber of Pension Actuaries (SKPE) had “shortcomings”, OAK devised its own standards.
In April, SKPE issued a revised version of FRP 4, that satisfied OAK. As a result, the updated rules were declared as binding for all pension actuaries and OAK withdrew plans to enact its own standards. FRP 4 describes the procedure to be followed by the appointed pension actuary in recommending the technical interest rate, and applies to all financial statements from 31 December 2019.
The technical interest rate should be below the expected net return of the pension plan’s investment strategy, with an upper limit defined by the guideline. In calculating this figure, the actuary should consider the structure and characteristics of the pension plan. and also give the reasons for his recommendation in writing.
There are also plans to offer higher benefits to low and middle-income workers, and part-time workers – especially to women.
The Federal Council has announced that it will publish draft legislation for consultation by the end of this year, before the final version is debated in parliament.
However, the transition measures for this proposed legislation have proved controversial.
Some pension funds – especially those of larger companies – have complained that it is unfair that they will have to contribute towards the pension top-up payment.
And a fourth social partner, the Swiss association for small businesses (SGV/USAM), has also declined to support the proposal.
“They say the plans are too all-compassing and too expensive, and they fear additional costs in relation to social security contributions,” says Simon Heim, head of Swiss Life’s employee benefits legal practice.
Both the Swiss pension fund association ASIP and the Swiss association for small businesses (SGV/USAM) have come up with their own proposals.
The ASIP plan includes lowering the conversion rate to 5.8%, bringing forward the start of pension savings to age 20, and 10 years of transition measures to be paid for by pension funds. ASIP argues that its proposal best meets the demand for a cost-effective and easy-to-implement reform that takes into account the specific structures of the different pension funds.
The SGV/USAM proposal is considered less expensive than the other two proposals. However, it will not guarantee the current nominal pension since both pensionable salary and contributions would remain unchanged.
“These other proposals are also being discussed,” says Heim. “However, it is expected that the draft parliamentary bill will be based on the proposal of the three social partners. It then remains to be seen whether any significant changes will be made in the final version. If the bill ultimately gets through the Federal Assembly, the question is whether there will be another public referendum.”
Another contentious area is the planned regulation for multi-employer funds. As the number of single-employer funds decline, multi-employer funds are becoming more important.
The Swiss second-pillar regulator (OAK) is preparing a new directive on risk control and governance regulations for these funds, a public consultation on its draft proposal having ended in January 2019.
The draft aims to give regulators further power over multi-employer pension funds by introducing additional risk-reporting requirements. It has also received a barrage of criticism, particularly from ASIP, which highlighted its perceived regulatory overload, the costs of reporting requirements and – it said – the sheer impracticability of some of the rules. It is also claimed that the rules have no basis in current pensions legislation.
OAK is now expecting the draft regulation to be revised by the end of this year. It remains to be seen whether, and to what extent, the points criticised by the industry will be taken into consideration.
Meanwhile, there has been one happy ending – the amendment of the ordinance governing collective pension investment foundations (ASV) took effect in August, allowing greater flexibility in asset allocation for these investment foundations.
In mixed portfolios, the 50% limit on equity weightings has been abolished, while the cap on alternatives has been raised to from 15% to 25%. Direct investments in alternatives are now also allowed, while investors have been given more rights with regard to the appointment of the members of the board of trustees.
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