The formula behind Switzerland’s minimum interest rate on mandatory pension contributions is to be reviewed to see if an alternative might better reflect the current yield environment.

The independent commission that advises the Swiss government on the interest rate (Mindestzins) said it was setting up a working group to analyse the formula. The working group’s findings, expected in the spring of 2018, would inform any changes to its approach to setting the rate.

In the meantime, the commission recommended that the government should not review the rate this year, and keep it at 1%.

IPE understands this is the first time that the commission’s methodology has been subject to a review, although discussions about the appropriateness of the formula have been going on for some time.

The minimum interest rate has been on a downwards trajectory for several years, although some Swiss pension funds pay a higher effective rate. In 2015, for example, when the legal minimum rate was 1.75%, the average effective rate was 1.91%, according to a survey from consultancy PPCmetrics.

Several business trade bodies reportedly wanted to see it lowered to 0.5% this year, which would be a new record low. 

André Tapernoux, head of wealth at Mercer in Switzerland, said there would have been pressure for a higher rate, however, given decent investment performance this year and a rise in yields. He described the commission’s recommendation as a compromise and the search for a new formula as an attempt to depoliticise the matter.

The recommendation is not binding, but the government has so far followed the commission’s suggestions.

The current formula has been used for several years, and assigns a strong rating to historical government bond yields – although equities, real estate and other fixed income securities are taken into account.

Source: Various
 Minimum interest rate 
2003 3.25% 
2004  2.25% 
2005  2.50% 
2008  2.75% 
2009  2.00% 
2012  1.50% 
2014  1.75% 
2016  1.25% 
2017  1.00%

The president of the commission, Christie Egerszegi-Obrist, told IPE the working group would assess whether a different formula could better capture current market yields.

There was broad support within the commission to set up a working group to analyse the purpose of the minimum interest rate and the role it plays in different types of pension providers, she said.

Hanspeter Konrad, director of the Swiss occupational pensions trade body Asip, said it backed the commission’s decision.

Trade union SGB/USS was positive about the commission’s move, calling it sensible and saying that it meant the commission could adapt the formula to the “reality” of Swiss pension funds’ investment behaviour. Trade unions have argued for such a review in the past. 

Peter Zanella, senior consultant and Pensionskassen specialist at Willis Towers Watson, took a different stance, questioning the value added by a commission in the first place. 

He said it would be difficult or even impossible to come up with a formula that would suit all Pensionskassen given the diversity of their structures.

Rate-setting should be depoliticised, Zanella said, with Pensionskassen allowed to set the minimum interest rate on their own based on their risk capacity.