SWITZERLAND - Swiss unions have warned the government is cutting the minimum interest rate required for retirement assets by 0.75 percentage points by too much.

Swiss president Pascal Couchepin has proposed the minimum interest rate for pension providers be lowered from the current minimum return of 2.75% to 2% in 2009, in light of developments on the financial markets.

But union representatives - demanding a 2.5% rate for next year - argue this would lead to unnecessary pension cuts and a "weakening of the trust in the pension system".

The minimum rate has to be guaranteed by pension funds as well as insurance companies offering retirement products. While pension funds add any profit they make beyond the rate to their members' assets, insurance companies get to keep any surplus profit while clients face possible pension cuts.

However, pension funds returned an average of only 2% on investments last year while the minimum interest rate had been set at 2.5% the year before. Even in September authorities fixed the rate for 2008 at 2.75%, citing good return for pension funds from capital markets. (See earlier IPE story: Switzerland to raise pension savings interest rate)

Any gaps between the actual rate of return and the minimum interest rate has to be filled from reserves accrued by the pension providers.

"A repeat of the over-hasty and massive cut in the minimum rate, which in 2002 led to widespread uncertainty about the sustainability of the second pillar, would be in the interests of neither the government nor of the employees," transport union Travail Suisse said in a statement.

The rate was cut from 4% to 3% back in July 2002 following market turbulence in the wake of the burst of the dotcom bubble.

According to the Swiss federation of unions (SGB), the rate had been set too low in the earlier years when returns from investments were good.

"We demand the same caution the government has shown in raising the minimum interest rate over the last few years in this current discussion about cutting it," the SGB said in a statement.

Unions are also demanding negotiations over the minimum interest rate be postponed from next spring until autumn as it is impossible to forecast economic developments for next year.

Under Swiss law, unions and industry representatives get their say on the minimum interest rate for the following year in spring while the government only decides on the rate in autumn.

Some market participants agree with this demand by the union while the pension fund federation ASIP has even suggested the minimum rate should be completely scrapped.

In earlier debates about the minimum rate ASIP suggested pension plan funding based on profits made by the pension providers could only be evaluated and shared among the companies and their members once they have actually been made.