There has been no agreement on increasing the retirement age for Swiss women to match that of men since the last changes to the first pillar AHV/AVS system were agreed in 1994. Almost 20 years on, the government, through Interior Minister Alain Berset, has now presented a comprehensive reform package for all retirement provision apart from third pillar personal savings. It is known as Altersvorsorge 2020. “The longer it takes to rectify mistakes in the second pillar, the more painful the losses affected generations have to accept,” says Hanspeter Konrad, managing director of the pension fund association ASIP.
According to the current draft, one of the most pressing issues in the second pillar, the level of the minimum conversion rate, will be addressed. The rate is to be cut from 6.8% to 6% over four years at a rate of 20bps per year starting from the day the law takes effect. Additionally, it is to be reviewed every five years instead of 10 years as the current legal framework asks for.
To soften the blow for pension fund members saving for retirement, additional financing will be transferred from the Sicherheitsfonds, the pension protection vehicle into which pension funds pay contributions.
Colette Nova, deputy director at the social ministry (BSV), confirms that this will mean a hike in contributions to the Sicherheitsfonds. Her department is expected to draft a legal text from the government’s proposal by year-end, which will then be published for consultation.
Another area in need of reform, according to Berset and others, is setting the minimum interest rate. This is currently set in advance for the coming year based on future return assumptions. The government now wants to set it towards the end of the year for the year-end calculations based on observations of returns.
But events might have overtaken the reform, suggests Werner Hertzog, managing director of Aon Hewitt Switzerland. “There are pros and cons to jointly covering the first and second pillar in one reform as the music in the second pillar has not been playing on a political level for a long time. Reality has overtaken politics.”
He notes that pension funds no longer trust or wait for political solutions but are instead looking for legal possibilities and loopholes to adjust their pension plans.
As examples he notes the trend to de-risking asset allocations, the introduction of pure defined contribution schemes similar to those in the US or UK in above-mandatory schemes, the internationalisation of retirement provision in multinational companies, as well as making pension payouts more flexible.
Another case is the conversion rate, which is on average closer to 6.5%. To ensure sustainable long-term funding, many pension funds managing above mandatory contributions on top of the legal mandatory scheme have lowered their conversion rate below the legal minimum. For the mandatory assets they are using the legal minimum rate but for everything else they are free to choose a rate. This, however, means that active member assets are being redistributed to retirees as their pension benefits cannot be touched according to Swiss law.
All of those measures have been introduced without any changes to the legal framework. “Pensionskassen are no longer expecting any major initiatives from the politicians,” Hertzog says.
However, the reform proposals also have to be viewed as a package. Indeed, Konrad warns “all those who are challenging the package based on a political or personal agenda are recklessly putting our pension system at risk.”
And Gérard Fischer, CEO of Swisscanto, sees a positive note in the government’s proposals. “The first pillar is no longer presented as
a problem-free zone as some political groups want to see it,” he says. He adds that challenges are being identified and acknowledged, among which are demographic changes and increasing longevity risks.
To increase resources for the first pillar, Berset has suggested an increase of the VAT by up to 2%. This would require a referendum under Swiss law.
Apart from a rise in the statutory retirement age for women from 64 to 65 years to match that of men, following a transition period, there will also be discussions on early retirement and flexible old-age work schemes.
For the second pillar the government proposes adjustments to the contribution period, considering early contributions before the age of 25 as well as a mandatory contribution period up to the age of 65.
On a more negative note, Fischer points out there is too little differentiation in the reform package between public- and private-sector pension funds. He adds the proposed additional financing for the first pillar via VAT and for the second pillar from the Sicherheitsfonds will only lead to further transfers between the two.
Fischer also points out that some problems remain unmentioned in the reform package. One example is when insurance companies passed higher costs arising from the Swiss Solvency Test back to clients.
“The risks and side effects of this package cannot be fathomed as it is in fact increasing opacity instead of reducing complexity. It is therefore advisable only to take this medicine with great caution,” he notes.
But for ASIP the reform proposals are “a step in the right direction”. It hopes for “an open, constructive and comprehensive debate on a sustainable and reliable retirement, invalidity and survivors’ provision”.