Switzerland: Reform hurdles to overcome
AV 2020 reform package faces public referendum as well as approval by the cantons
• The AV2020 pensions reform package faces a public referendum this month but the outcome is uncertain.
• Amendments to the law on vesting in pension plans are yet to take effect.
• Proposed legislation banning cash withdrawals from the mandatory portion of pension fund savings is likely to face opposition.
• A bill has been published to regulate the transfer of pensioners between pension schemes.
The overarching legislative question this autumn for the Swiss pensions system is whether the Altersvorsorge 2020 (AV2020) pensions reform package will reach the statute book by the end of the year.
This mammoth piece of legislation is a comprehensive reform of both first and second-pillar systems, and aims to ensure the financial sustainability of the system while guaranteeing the current level of benefits.
For both pillars, it contains proposals to harmonise the normal retirement age at 65 for men and women. First-pillar-only reforms include changes to survivor benefits and increasing valued-added tax (VAT) by 0.6%.
In the second pillar, the proposals would lower the minimum conversion rate – used to calculate pension payouts from accrued assets – from 6.8% to 6%.
To compensate for the proposed cut in the conversion rate, the aim is to increase the pension capital saved by individuals. This is to be achieved by raising the amount of pensionable salary, as well as contributions from both employers and employees. There is also to be a ‘top-up’ payment for the state pension.
The Swiss government is in favour, and the bill was finally approved by both parliamentary chambers last March.
However, the final hurdle – a public referendum to be held on 24 September – could prove to be an obstacle.
The ballot paper handed to voters will contain two questions: are you in favour of the pension reforms? And are you in favour of the planned increase in VAT? The proposed VAT hike is needed to ensure the funding of the first pillar.
Both proposals need approval in the referendum for the AV2020 reforms to go ahead. A simple majority of votes on the VAT question is not enough – there also has to be a majority of the 26 cantons individually saying ‘yes’ as well. And tax increases are never popular, whatever the country.
Although opinion polls in summer – when campaigning started – were predicting 60% support for both proposals, the outcome is still uncertain, says Simon Heim, head of Swiss Life’s employee benefits legal practice.
He says: “If the VAT proposal is rejected, this would mean no reform at all. However, maintaining the status quo would inevitably lead to more drastic actions in the future, since without any changes, the first pillar is expected to be in the red as of the year 2020, with an estimated structural deficit of CHF170m (€153m) that will increase to CHF7bn by 2030.”
He adds: “As far as occupational pensions are concerned, the issue of the significant redistribution from gainfully employed to retired people would continue to persist.”
If approved, however, the new law would take effect in January 2018, with several transitional provisions.
Meanwhile, the amendment of the law on vesting in pension plans (FZG/LFLP), approved by Parliament in December 2015, is still awaiting the updated ordinance from the federal council in order to take effect. The amendment applies to so-called 1e plans – top-up plans which companies may offer to higher-paid employees on the portion of their salary above the ceiling for mandatory contributions, currently CHF126,900 per year.
At present, members are assured a minimum level of benefits, even if they opt for a risky strategy that delivers poor returns. The amendment transfers the burden of investment risk to plan members by waiving certain guarantees if the member chooses the investment strategy.
There has been some opposition from providers, especially as regards the proposed limitation of investment strategies to be offered to plan members.
It is still not clear when the law will take effect, but January 2018 is mentioned as a possibility.
The government’s initiative to curb the perceived abuse of statutory supplementary benefits by people using their second-pillar savings for luxury expenditure is still awaiting parliamentary approval.
The so-called amendment of the law on supplementary benefits to the first pillar has been passed by the upper chamber but awaits debate by the lower chamber.
At present, individuals reaching retirement age are generally allowed to withdraw their second-pillar savings as a cash lump sum. Some people have supposedly spent this money on lavish holidays or at the casino, subsequently claiming supplementary first-pillar benefits.
One of the key elements in the original draft is that it restricts cash withdrawals of the mandatory portion of pension fund savings. It would no longer be possible to withdraw capital lump sums, with retirees forced to take an annuity for all of their pension pot.
Meanwhile, the government has proposed a bill to regulate the transfer of pensioners from one scheme to another. The objective is to avoid unfunded pension liabilities, which at present are ultimately borne by the national Pension Protection Fund. According to the proposal, such transfers would require sufficient funding based on a reasonable valuation of the liabilities and must be approved by the regulator.