SWITZERLAND - A commission advising the government on second-pillar pensions has recommended Swiss pension funds raise the minimum interest rate on member savings to 2.75% per annum from 2.5% now.

The government is to consider the commission's recommendation later this summer and if, as has been traditionally the case, it follows the advice the increase would take effect from January 1 2008.

According to Claude Frey, a Swiss parliamentarian who is president of the panel, the increase is justified after two straight years of excellent returns on part of Swiss schemes.

"One cannot favour a flexible interest rate and then only adjust it downward," Frey told the Swiss press. "Employees must also be able to profit from the good times on financial markets."

The bull run on equity markets in 2005 and 2006 enabled Swiss schemes to post average returns of 11% and 6.9%, respectively.

The panel's recommendation was a compromise struck between its 20 representatives, including from the government, the cantons, pension funds as well as employers and unions. Prior to agreeing the compromise, the panel voted down a proposal by union representatives to increase the rate to 3% from January 1.

Frey suggested the commission should remain cautious, however, as private schemes need to remain fully-funded, as they, unlike public schemes, do not have an implicit government guarantee.

"One must also not forget that we're talking about the minimum interest rate for pension savings. If the schemes continue to do well, they are free to offer higher rates," he added.

Yet Swiss pension funds are not in the least enthusiastic about having to increase the rate at all. According to them, this will undermine their ability to build reserves to deal with future risks such as sudden market fluctuations and longevity of pensioners.

Indeed, in late 2005, Swiss pension fund lobby ASIP urged the government to cut the rate to 2%. Then last month, it even called for the interest rate and the conversion rate for annuities to be abandoned altogether. In their place, ASIP proposes pension savings for an employee be credited with annual interest equal to 8% of salary.

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