Switzerland: Let’s try this again
The Swiss government is to present a social security pension reform bill in the autumn, including some measures rejected by the public in 2017
- The government is due to table a social security pension reform bill in the autumn
- Three social partner organisations have agreed a second-pillar reform proposal that includes lowering the conversion rate from 6.8% to 6%
- The federal supervisor is working on risk control and governance rules for multi-employer pension providers
The Swiss pensions system has made significant advances in the separate reforms of the first and second pillars. That is despite the public’s rejection two years ago of a pensions reform proposal that packed in changes to the state pension and occupational pensions.
Most recently, the federal government decided reform measures for the unfunded state pension, known as AHV in German and AVS in French. The plan, which reprises some measures included in the proposal that was rejected in 2017, will be presented to parliament this autumn.
The aim of AHV 21/AVS 21, as the government has called its initiative, is to maintain pension benefit levels while balancing the first pillar’s finances. Last year the deficit in the state pension was CHF1bn (€890m) and the situation looks set to get worse from next year as baby boomers begin to retire.
To tackle this problem, the government wants to raise the minimum retirement age for women from 64 to 65 to match that for men, ideally by 2021. There will be temporary compensatory measures worth CHF700m.
If approved, the higher pension age would also apply to the law governing occupational pensions. It has also decided to propose allowing people to choose to start receiving the state pension at any point between 62 and 70 years of age.
Other measures include incentives to work beyond 65 years of age.
The value-added tax rate, with revenue, destined for the state pension pillar, would be increased from 2022 by a maximum of 0.7 percentage points.
The government announced the planned reform measures in July. That was a month and a half after the Swiss public voted in favour of a bill – linked to corporate tax reform and known as STAF – that provides for an additional CHF2bn per year for the social security pension pillar from 2020. This is to be financed via higher employer and employee contributions, the first AHV-related increase in 40 years. The federal state would increase its contribution by CHF800m.
According to the government this would halve the state pension’s financing needs, However, CHF26bn would still be required to keep the state pension reserve fund’s annual expenditure at the legally prescribed level until 2030. Its AHV21 proposal is intended to address this requirement.
The final implementation schedule for all measures will depend on the outcome of a parliamentary debate on the amendments in the autumn.
A day before the Swiss government announced its AHV21 plan, two large trade unions and the association for employers announced they had agreed on a reform proposal for occupational pensions.
The main feature of the proposal is an immediate lowering of the minimum conversation rate from 6.8% to 6%. This figure, which determines the annual pension, is fixed in law in relation to mandatory contributions.
Scrutiny of multi-employer plans tightens
As in some other European countries, there is a clear consolidation trend in the Swiss pension fund sector.
The number of single-employer funds has declined over the years, while multi-employer plans, in the form of Sammeleinrichtungen or Gemeinschaftseinrichtungen, have grown in size and number.
Now, the federal supervisory body for occupational pensions (OAK BV) is working on rules that are supposed to improve these institutions’ governance and enhance local regulators’ ability to assess any risks associated with them.
According to OAK BV, the rules are necessary because of the various and often complex ways in which the different types of multi-employer entities are organised, and also because they compete with each other.
The IMF has referred to this competition as “potentially ruinous”. It said that some collective schemes “act less prudently” by maintaining technical parameters at levels that are attractive to members in the short term but of questionable sustainability, and that this needs to be scrutinised.
The draft regulation published by OAK BV last autumn were strongly criticised by industry associations. Both ASIP, the occupational pension fund association, and Inter-Pension, the association for collective pension funds, accused the federal supervisor of overstepping its authority. The charge has been levelled at OAK BV before, with other arguments including that the directive was not practicable or proportionate, and that it would be harmful.
According to OAK BV, the draft regulation is due to be revised by the end of 2019 but that there could be delays.
There will also be discussions with associations as there will be new responsibilities for actuaries and auditors on top of the regulations for the pension providers and the supervisory authorities.
Those working in occupational pensions have long called for the conversion rate to be lowered in light of the prevailing interest-rate environment. Low and negative rates mean that active members increasingly cross-subsidise retirees.
To compensate for the lower conversation rate, the social partners proposed that a fixed pension top-up be paid to preserve benefit levels for 15 generations of new retirees. The additional amount applies from the time the reform took effect. It is also planned to offer better benefits to those on low and middle incomes and part-time workers, especially women.
The top-up payment would be financed through a contribution of 0.5% of wages.
In a TV interview, Alain Berset, the interior minister, referred to the social partners’ agreement as “a small miracle”. But the proposal has a long way to go if it is to come to fruition, as the government still needs to draft amendments to occupational pensions legislation (BVG/LPP). These changes would need to be consulted on and eventually approved by parliament. It is not clear if there would be a public referendum.
According to SAV/UPS, the employer association that elaborated the proposal with the trade unions SBG/USS and Travail Suisse, Berset welcomed the proposal. He also indicated draft changes would be ready for consultation in November with a view to presenting a proposal to the parliament as early as possible in 2020.
Not everyone is on board, however. The Swiss association for small businesses declined to support the trio’s proposal. Opposition is also possible from people who see reducing the conversion rate as taboo.
In an initial reaction, ASIP, the Swiss pension fund association, welcomed the social partners reaching an agreement and said the proposal took into account some of the industry’s demands. However, it noted that the fixed top-up payment would introduce an unfunded element into the second pillar and that it would take a close look at the measure.
ASIP’s own second-pillar reform proposal includes lowering the conversion rate to 5.8%, bringing forward the start of pension savings to the age of 20, and 10 years of transition measures to be financed by pension funds.