Switzerland: 99 questions
The Swiss pension industry is confronted with as many questions as answers while the government consults on second pillar reforms, writes Barbara Ottawa
The process started in March 2010, when Swiss voters said ‘no' in a national referendum on the mandatory conversion rate for pensions (see panel). In fact, there had been debates on several issues regarding the mandatory second pillar before the crisis, but the overwhelming rejection of a further cut in the rate used to calculate pensions forced the government to aim for a broader discussion.
"After the referendum, the government used the opportunity to draw up a more detailed report than the usual one on the conversion rate in order to regain trust and discuss all possible changes," says Colette Nova, former secretary general at the Swiss union federation SGB, who took over the department for international affairs and occupational benefit plans at the Swiss social affairs ministry (BSV) in April 2010.
But Nova admits that at over 160 pages the report - published in late 2011 - might "have turned out to be a bit broader than expected" and confirms that some of its suggestions will most likely not be part of any further debates, including a standardised Pensionskassen model or a free choice of Pensionskasse for each individual.
"We know the situation in Switzerland and are aware this will not happen, but at least it will have been discussed and we can gauge how many people are in fact interested in them," Nova points out.
However, many representatives from the pension industry criticise the government for the report saying it "lacks priorities and focus" as ASIP, the Swiss pension fund association, put it.
Similarly, while welcoming the debate triggered by the report, Dieter Stohler, former managing director of the Pensionskasse Basel-Stadt and now heading Switzerland's largest public pension fund Publica, notes that "too many fundamental questions were not mentioned" and that the paper is instead "losing itself in details possibly leading to more regulation which would be counterproductive".
The Swiss pension industry had until the end of April to comment on the report. They had been sent a questionnaire with 99 points on which to tick boxes marked "more likely yes" or "more likely no".
However, the few responses published so far prove that the industry has more to say on the subject as most answers were preceded by a lengthy assessment of the problems in the second pillar and an appeal to the BSV to ‘prioritise' some of the issues, mainly the conversion rate.
To that, Nova answers that this "prioritisation" was a task for the government and was therefore "to come" once the BSV had presented its assessment and summary.
The pension think tank Innovation Zweite Säule (IZS), made up of Pensionskassen experts, criticised that the report is mainly based on findings by the Pension Commission which is no longer only made up of independent Pensionskassen representatives and employer and employee representatives.
"The fact is companies with a commercial interest in the second pillar now play a role in the Commission," the IZS points out. This was not in line with the original legal mandate.
Further, the IZS notes, the report lacked ‘scientific methodology' and did not assess the problems in the second pillar in light of future demographics and other trends.
Michael Schmidt, managing director of the collective scheme Alvoso for SMEs, noted in a survey by the VPS publishing group: "First of all, it would be desirable for politicians to clarify whether they wish to set out [the parameters of] the contribution side or of the benefit side. They can't have it both ways."
He added that parliament should decide whether to return the law on the second pillar, the BVG, to its original status as framework legislation or whether to implement detailed federal regulations.
Brigitte Schmid, managing director of the Pensionskasse of Swiss Re urged politicians to return more control to trustees and boards of Pensionskassen.
The general tenor of the comments, including those made by ASIP, by the insurance federation, the actuarial association, employer representatives and by some unions, is a call for speedy legal amendments, especially to the conversion rate, as well as a warning against too much regulation and a watered-down version of the separated three-pillar pension system through cross-financing.
"Given the expected number of statements we will need some time to sift through them and present our findings to the government," says Nova. She emphasises that the government is currently neutral towards all the proposals and that only after receiving summary statements from the BSV will it decide which suggestions to follow up on.
"I think there might be several packages and probably not all of them will be implemented at the same time as a major overhaul of the system might be too much effort and cost too much," Nova explains.
She adds that the last major overhaul of the system, the first revision of the law governing the second pillar (BVG), happened "not that long ago" in 2003 and a further major amendment might not be necessary.
Nova and all experts - apart from the union representatives - agree that a reduction in the conversion rate is necessary
"From an expert viewpoint it is clear that something has to happen", she notes that "there is a much greater need for action now than at the time when the government first proposed a further cut of the conversion rate as falling interest rates and returns, as well as higher longevity are continuously aggravating the situation".
"But I cannot predict what the politicians will decide in the end," the former union head points out.
Stohler, who is also member of the ASIP board, thinks that "even 6.4% is too high" for a minimum conversion rate.
"The rate should not be set in a legal framework but by governmental decree," Stohler points out echoing the criticism of many Pensionskassen representatives. This would also prevent further referenda on the subject as these can only be held over bills and laws.
Stohler also emphasises that the rate should be set as a "realistic minimum rate at a very cautious level, most suitably according to a formula".
However, the trade union federation (SGB) remains opposed to a further cut in the conversion rate, threatening another referendum should a new bill on the subject be brought forward.
The SGB argues that the low interest rate environment is temporary and that the calculations on the conversion rate were based on longevity expectations for privileged groups like civil servants whereas the life expectancy of some blue-collar workers might be several years lower.
Another major issue, many respondents to the report agree, is the so-called ‘legal quote'. It determines how much profit insurers offering insurance-based pension coverage for companies can keep for themselves and how much they have to transfer to the pension scheme.
They can currently keep 10% of gross profit and add administrative costs to the remaining amount, a practice criticised by many non-insurance schemes in the industry. Furthermore, some see this lack of transparency as the main reason why the referendum failed.
In its statement, ASIP called on all parties involved to find a more transparent solution to the problem to prevent the "whole second pillar falling into disrepute".
It stresses that "insurers do have their place in occupational pensions and these pension schemes see a lot of demand from SMEs".
Similarly to solvency discussions in the rest of Europe, ASIP welcomed that the report does not see the need for a mandatory Swiss Solvency Test (SST) for second pillar vehicles.
"For Pensionskassen, which have to think long-term this type of risk assessment orientated to short-term market prices is wrong and it would lead to lost opportunities," ASIP points out.
According to Towers Watson, one of the most ‘unsatisfactory' legal practices currently in the second pillar is the so-called part liquidation of funds when certain cohorts of people leave a Pensionskasse.
The consultancy notes that currently pensioners having to leave a scheme - because of company restructuring or mass lay-offs - often have to forgo parts of their pension assets in order to help fund liabilities of active, and in particular retired, members of the Pensionskasse.
Simon Heim, consultant at Towers Watson Switzerland, points out that given the economic reality of an increasing number of company restructurings combined with demographic challenges, this problem will get worse. He stresses the "need for immediate action".
He also adds that a hike in the interest rate would indeed ease the problem but "not solve the basic asymmetry in the system of placing too much focus on the retired members".
The issue is mentioned a few times in the report as part of the debate on including pensioners in recovery measures at Pensionskassen but Towers Watson has more far-reaching suggestions.
Heim mentions the possibility of creating sole pensioner funds which might guarantee a certain minimum pension, or the introduction of deferred vesting - in other words, people leaving their benefits in the fund when they are leaving as active members.
Further, Towers Watson suggests a debate on the funding of liabilities at a risk-free rate instead of using a discount rate, the so-called technischer Zins. But Heim knows that this would lead to major funding demands which - especially in this economic environment - could not be fulfilled.
In a joint statement on the questionnaire on the second-pillar report, ASIP, insurers, actuaries, employers, Pensionskassen experts and bankers agreed that pensioners should not have to help finance recovery measures.
For ASIP such a measure might only be discussed for above-mandatory assets and only as an ‘ultima' ratio solution to keep minimum safety standards in the second pillar intact.
These are just a few of the major topics currently discussed in Switzerland where debates on the future of the second pillar have only just started in the wake of the financial crisis and the setting up of the new ‘super' supervisor, the Oberaufsichtskommission.
But time is already running out - at least for the debate on the conversion rate - because in 2014 the new level of 6.8% will be reached and no further cuts have yet been agreed.