The global professional services company PwC has introduced the concept and the energy company PKE will soon introduce it. The national rail operator SBB, the public pension fund Publica and others are looking into it. The concept is variable pensions. Instead of a fixed benefit level, part of retirees’ income is dependent on other financial factors. The details of these new structures differ in each of the few pension funds that have introduced this model, but there is one thing they have in common – this is a major breach of a taboo in a country where retirement savings are a holy cow.
But Josef Bachmann, managing director of the PwC Pensionskasse, sees a change in members’ stance on benefit flexibility. His pension plan was the first to introduce a two-part model for pension payouts in 2005. One part is fixed and the other is linked to performance.
“Since word got out that the Swiss federal railway SBB is considering variable pensions, the Swiss pension fund world has been talking about it intensively and many of the main newspapers have covered the topic in interesting and mostly positive articles,” says Bachmann.
Last year, Dieter Stohler, managing director of the largest Swiss public fund, Publica, confirmed that even his well-funded pension fund is looking into variable pensions to ensure sustainable long-term funding. And, in the meantime, the energy company PKE has announced it will be introducing a model similar to that of PwC for all members retiring after 1 January 2014.
Ever since, the PKE pension fund has put up links to articles and debates on the subject on its website to inform members about the measures and about other people’s views on the subject. The energy company will be guaranteeing 90% of the pension with the final 10% linked to the fund’s performance.
When the Swiss tabloid Blick published an article on the SBB mulling a similar concept, PKE put up a link on the website arguing it must be the right way forward if even the Swiss federal railways are considering benefit flexibility.
But Markus Hübscher, managing director of the Pensionskasse SBB, stresses that this remains “one possibility” to help put the financing of the pension fund on a more sustainable footing. The other solution would be to adjust the technical parameters of the conversion rate or the technical interest rate even further than already anticipated.
“Fact is, today we are taking money from the younger generation and redistributing it among the pensioners,” says Hübscher, who thinks flexibility of pension payouts could be a valid solution to significantly reduce this redistribution process (figure 1).
The model that SBB is looking into would base pension payouts for new pensions on the financial situation of the fund. “The interest rate granted on active members’ assets would serve as a benchmark for the level of pension payouts,” Hübscher explains. He says a model which directly linked the funding level to the level of pension payouts applied by other pension funds has already been rejected by SBB.
A decision is to be made in the coming months but implementation would not take place before 2017.
Hübscher stresses that the model needs “a lot of communication and explanation” to reassure the pension fund members. “These considerations are breaking a taboo as they are something completely new and new things need explanations,” he says.
This is particularly true because the fund’s motives and deliberations were not clear to all and some people just filled the discussion with “highly polemic slogans”.
Bachmann saw the need to present the changes to the pension plan personally at eight PwC locations. “Nobody was happy about it but they all saw the necessity of the measure and accepted it in the end,” he adds.
In a newsletter sent to pension funds earlier this year the consultancy Aon Hewitt noted that the concept of benefit flexibility “might seem a bit alien” to most people: “But after careful consideration, an actively targeted sea-change is preferable to the threat of a financial dead end.”
The consultancy added that although several pension funds were looking at the concept, few have gone down this path. And Hanspeter Konrad, managing director of the Swiss pension fund association ASIP, confirms that “there is no real trend yet”.
Bachmann believes variable pensions are “the only possible way to finance pensions in a funded second pillar. Otherwise there are always winners and losers and it might even happen that people who lose money as active members are then also losing out when they are retired.”
It makes more sense to ensure pension funds remain solvent over the long-term than to have a fixed level of pension payouts in the short term, he believes.
Another argument he uses to convince people of the advantages of this model is purchasing power parity. “Much more important than fixed payout levels are pensions mirroring the current purchasing power.” He explains that in a low-inflation environment slight cuts were much more bearable for pensioners than to have no top-ups in times of high inflation.
Hübscher is convinced that variable pensions are “less complicated” and leave you with more possibilities to adjust benefits depending on the financial situation of the fund.
Since last autumn, Pensionskasse SBB has a conversion rate below 6%, at 5.848%, which is lower than most other Swiss pension funds. The technical interest rate is at 3% and the fund has already started to build buffers against a further cut in rates, which is yet to be decided. This measure will take place regardless of whether benefit flexibility is introduced.
“Variable pensions would mean we would not have to cut the rates any further and would give us more breathing space,” Hübscher explains. “Otherwise we might cut too heavily and burden both the pension fund as well as the employers with too large a recovery package.”
Bachmann stresses that flexibility only benefits a pension fund in the long term. For one, no changes to existing pension promises are possible within the current Swiss legal framework. “The more fund members are entering the new system, the bigger the safety net grows and in our fund it will take about 15 years in total to become fully operational – so about another six years now,” explains Bachmann. “It would happen much faster if existing pension contracts could be included,” he adds.
He is convinced that this will save the PwC Pensionskasse when other funds are struggling. Indeed, one of the arguments Aon Hewitt is using in favour of the model is also the “widening of the risk pool” in a pension fund to include retirees, and not just active members.
One other hurdle for benefit flexibility is the law on the second pillar itself (BVG). Within the BVG mandatory framework a minimum standard for pensions is set which “leaves no room for flexibility”, confirms Konrad.
He says ASIP, in principle, favours a discussion of such a step between pension funds and members but adds that only funds with above-mandatory contributions can afford to do so.