The Swiss government is trying to devise a reform for the first pillar while pension funds wait for an update on regulation
• The Swiss government has put structural reforms to the pension system on hold
• Pension experts are calling for the spread of variable pension plans
• Switzerland needs to prepare for an older workforce
The Swiss public’s ‘no’ to the reform package Altersvorsorge 2020 in September 2017 left a void in the pension debate, which was exacerbated over the summer by a record-breaking heat wave. “It has not been this dry in Switzerland in close to 100 years,” according to one newspaper headline.
And to some in the Pensionskassen industry it might feel just as long since they had been promised adjustments to the minimum technical parameters such as the conversion rate (Umwandlungssatz). It remains at 6.8%, a rate that had been decided on during the first revision of the law regarding the Swiss second pillar (BVG) in 2005. Given the protracted low interest-rate environment, most experts agree it should already have been cut to below 6%. But both in 2010 as well as in 2017, when the Swiss people rejected reforms to the second pillar, the Umwandlungssatz was one of the additional measures which was dismissed along with the rest of the package.
Larger pension funds can still circumvent the problem by lowering the conversion rate on those contributions that employers paid above the mandatory minimum. They can then calculate a ‘shadow rate’ for the legal minimum payouts. Nevertheless, technical parameters, which are out of sync with the economic realities, are leading to distortions in pension funds. In some cases they are already causing cross-financing of pension payouts from active members’ asset pools.
In a way this is symptomatic of an initially good model of mandatory pensions that got stuck along the way because of political inertia. It also suggests an inability to explain problems to the Swiss people, despite their important role in making decisions on reforms.
The conversion rate is just an example of a failure to make necessary changes to the system. In a comment on the post-referendum debate the former managing director of the PwC Switzerland pension fund, Josef Bachmann, noted: “The erroneous belief that the second pillar can be mended by money alone is deeply rooted.” His article, printed in the Swiss industry monthly, Schweizer Personalvorsorge, included a proposal for three measures needed to guarantee the sustainability of the mandatory occupational pension segment. The third measure he mentions is indeed more money, that is higher contributions from the companies to the Pensionskassen.
The second element is the slaughtering of a sacred cow: the inalienable pension payout. Since its introduction in 1985 those entering the mandatory second-pillar system know the levels of their pensions from the start. Bachmann says pension promises were made for 30 years or longer only based on “rough ideas” about how the returns and longevity will develop. He also says that only parts of the mandatory pensions from the second pillar have to be adjusted to inflation on a regular basis if the Pensionskasse is not sufficiently funded. “This means fixed pension levels are no guarantee for maintaining the purchasing power,” he says.
Like Bachmann, the think tank Avenir Suisse also published a comment during the summer in which it demanded a rethink of the fixed pension payouts. Jérôme Cosandey, head of social policy research at Avenir Suisse, suggested a fixed base payment and a top-up. “An adjustment of the conversion rate for new retirees needs a promise of a flexible additional pension with which they can participate in the development of the capital markets,” he wrote. He also proposed the application of the same interest rates for active and retired members’ assets “to strengthen the solidarity between the generations” in the second pillar.
The introduction of the so-called 1e plans, named after the section in the Swiss law that made them possible, offers a taste of variable pensions for higher-earners. More and more companies are offering those with higher incomes pension plans with a top-up that is linked to the performance of the Pensionskasse.
The first measure Bachmann mentions in his proposal for a more sustainable future of the second pillar is a broader adjustment to a later retirement age. He notes that while many people are preparing to work beyond the age of 65, the labour market has not yet adjusted to cope with this change. But Bachmann also called on those choosing to work beyond the statutory retirement age to show willingness to keep on training for new tasks, accept lower pension fund contributions from the employer and maybe even shorter working hours.
Cosandey criticised the Swiss government for not having touched on the subject of the statutory retirement age in its first draft on a financing plan for the first pillar fund AHV. In fact, it seems the government wants to take a two-step measure starting with an increase in value-added tax for an immediate top-up to the fund which is already starting to feel the oncoming wave of retirees from the baby boomer generation. Structural measures such as the retirement age are to be touched later. But Cosandey warned against splitting reform of the pension system into too many individual parts. “This way the bigger picture is lost,” he said.
Meanwhile, possible reforms of the second pillar are being negotiated behind closed doors by employer and employee representatives – without any deadline. But topics such as the retirement age and making retirement more flexible should be discussed in tandem between the two pillars.
For pension funds this means they have to continue tweaking technical parameters to ensure sustainability while also avoiding cross-financing as much as possible. With this heterogeneous application of discount rates and other key benchmarks it is still impossible to say whether a Swiss Pensionskasse reporting, for example, a 115% funding level is performing well or just good at calculating the right technical parameters.
Swiss public pension fund gets creative
It was supposed to be an act of liberation when public pension funds in Switzerland were given the right to become independent of the cantons and operate on the open market.
On the other hand, this gave the Swiss regions and city the opportunity to rid their books of guarantees they previously had to grant public pension funds – albeit mostly after a hefty top up pay to release the Pensionskasse into the wild with sufficient funding.
This was the vision that went into the decree issued by the supervisory authority “Oberaufsichtskommission” in 2012. However, eventually many cantons and other public authorities chose to uphold the state guarantee. One reason was that many did not have funds to top up the Pensionskasse immediately.
The other was the legal obligation for independent public funds to achieve full funding within 10 years after being stripped of state ties.
Since then most of the 16 funds (out of around 30) have been trying to achieve this legal requirement and many are on track. Some, like the Pensionskasse CHF12.8bn (€11.3bn) Basel-Stadt, suffered a major setback when they found the parameters with which the funding level (Deckungsgrad) was calculated, were too optimistic.
In June the canton of Wallis announced it had found a unique solution for its CHF4bn Pensionskasse PKWAL. It wants to split its pension fund into two – one, for people employed before 2012 with a state guarantee and an open fund for all other employees.
The Swiss think tank Avenir Suisse called this an “innovative and elegant” solution. “This makes the canton for new employees more attractive as they do not have to help carry the burden of former underfunded pension promises,” says Jerome Cosandey, board member at Avenir Suisse.
He added many cantons still granting guarantees for their public funds had “too little ambition” to achieve a better funding situation.
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