Victim of the system

In the 1949 film The Third Man Orson Welles famously stated: “In Italy, for 30 years under the Borgias, they had warfare, terror, murder, bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love; they had 500 years of democracy and peace – and what did that produce? The cuckoo clock."
To be fair, between manufacturing time pieces the Swiss evolved a system of direct democracy based on referendums, developed a way of holding together 26 fiercely independent cantons populated by people speaking four official languages, and had become a by-word for prosperity and for handling other people’s money with a discretion that doubtless the Borgias would have admired.
But more recently the brotherly love has shown signs of wearing thin. The Swiss People’s Party (SVP), having fought the October 2003 election on an anti-foreigner and anti-EU platform, emerged as the biggest force in parliament. Its first initiative was to demand the transformation of the so-called ‘magic formula’, a power-sharing agreement that had conferred stability on Swiss politics since 1959 by ensuring that the makeup of the seven-strong cabinet was not left to the vagaries of a parliamentary majority but rather saw portfolios divvied out between four leading parties in the ratio of 2:2:2:1.
Prior to the election the liberal Free Democrats (FDP), centrist Christian Democrats (CVP) and left-of centre Social Democrats (SPS) had two ministries each and the SVP one. But the SVP’s dominant personality, controversial billionaire Christoph Blocher, demanded a second seat and by December the SVP gained an extra post at the expense of the CVP.
The change was important because it has potential ramifications beyond mere ministerial musical chairs. Blocher has shown a willingness to depart from the somewhat staid traditions of Swiss politics and espouse populist causes. And the party’s emergence as a major force has coincided with a growing awareness that the Swiss pension system is in need of fundamental reform.
There is an ongoing attempt to introduce changes, but no programme for a general overhaul. “Over the past two or three years we have not seen any moves that would give the basis to have a real reform in the pensions sector, even through there is a general consensus that reform is needed,” says Werner Enz of Switzerland’s most authoritative newspaper, the Neue Zürcher Zeitung.

New regulations that came into force in January implemented changes to the second pillar including amendments to the rules on marginal income by lowering of the threshold to join the second pillar to CHF22,575 (e14,588) from CHF25,320 a year in a move that will extend the system to a further 100,000 workers.
“Reforms are under way on three levels,” says Werner Nussbaum of the Bern-based Pensions Education Centre. “First, at the end of 2003 there was a general reform with respect to the demographic change and financial market uncertainty. Then in 2004 we had another change with respect to the legal provision on financial stability as a result of the underfunding of pension funds. Then, third, we had a reform on definitions of pensions with a direct impact on the taxation system, the ‘agar’, of the voluntary pensions system.”
The 2003 change, which included the introduction of a ceiling on second pillar pension contributions and benefits, was denounced by Nussbaum at the time for upsetting a balance that is fundamental to the system and threatening its very existence. “The reform is not just a second-pillar issue, it affects the basic ground of the Swiss three-pillar concept,” he says. “For the past couple of decades Switzerland had a political consensus on the balance between the first and the second pillar. Switzerland is the only country in the world which has no ceiling on first pillar contributions. And counterbalancing this was an understanding that there should be no limit to second pillar contributions.”
The government’s move, he says, was prompted by a scandal sparked by a blatant abuse of the system when it was revealed in the late 1990s that ABB chairman Percy Barnevik had been given an undisclosed pension package valued at CHF148m when he had stepped down as the company’s chief executive some years earlier.
“The change was enacted very rapidly, without any accurate research into its outcome and after parliamentary debates that were superficial because the parliamentarians had not reflected on the historical consensus behind the basic balance.” Nussbaum says.
But Erz highlights more pressing problems facing second pillar. “I expect that two key issues will come to the boil this year and next and will focus attention on the second pillar’s sustainability,” he says. “First, the legally guaranteed interest rate for the mandatory pension system is too high. The initial rate employed to convert aggregated capital into year-on-year paid pensions was 7.2% and the government has decided to reduce it to 6.8% over 10 years. But it is widely accepted that the actuarially correct level should be between 5.8% and 6.3%. So we are seeing a transfer of resources from people who are working now to those who have retired.
“Second, and linked, is the question of the technical interest rate, which differs between pension insurers and multi-employer pension funds,” Enz adds. “The life insurance regulator, the BOPI, has set the technical interest rate at 2% while for the funds it is between 3.5% and 4.5%. This used to be correct, but the past is not a good guide to the future and it may no longer be sustainable. So clearly people drawing a pension now are getting more than those who will take their pensions in the future.”
Lukas Steinmann of independent economic and social think tank Avenir Suisse agrees. “The technical interest rate, used to compute liabilities, underestimates liabilities in pension funds’ books compared with assets, and so they pay too much out as benefits,” he notes. “And we have two kinds of guarantees, with in addition a minimal interest rate that was fixed at 4% and which worked very well as long as stockmarkets were performing well. However, pension funds and insurers are not able to earn 4% in the long run so the government reduced it, first to 3.25% and now to 2.5%, but this is still too high as the stockmarkets will not deliver 2.5%.
“The minimum interest rate was introduced because in 1985 when the second pillar was made mandatory the goal was that combined first and second pillar benefits should provide 60% of a person’s last wage,” he adds. “But now this minimum is resulting in a demographic effect, which should not in principle influence a funded second pillar pension system. In fact the guarantees mean that most second pillar schemes have certain defined benefit elements.”
Nevertheless, faults have been identified and the government is taking steps, albeit as yet inadequate or even misguided, to address them. So if the current state of the Swiss pensions system cannot quite be described as ‘problem solved’ then at least can as ‘problem tackled’? Well, not quite. Because Switzerland has a direct democracy that affects both the effectiveness of Swiss parliamentary legislation and the pace at which changes can be introduced.
“Under the Swiss political system we need to convince people,” says Reto Wehrli, a CVP parliamentarian and chairman of Schwyz-based pension fund Pensionskasse Pro. “We can’t say ‘now the ministers or even parliament have decided to do this or that’, you really have to convince people in the country.”
“The second pillar was established by a law, so parliament may change the law,” says Steinmann. “But when it does the change may be challenged through direct democracy. A referendum on a law may be called if 100,000 people sign a petition.”
A recent example was last year’s overturning by a referendum of legislation intended to tackle a funding problem that many see as a threat to the first pillar old age pension, the AHV. For Enz, the impact on the AHV of a deficit in the state invalidity insurance scheme, the IV, is the most immediate problem facing the government. “The IV has a structural deficit in the region of CHF1.5bn and the outstanding net amount is around CHF5bn,” he says. “The tricky thing is that the financing has to be taken out of the fund which is aggregated for the first pillar, and which by law should be able to meet one year’s full expenses. But it has been allowed to run down to about six months’ obligations. This means that the IV deficit is undermining the first pillar.”
Consequently, parliament voted to strengthen the AHV by raising VAT by 1% and using the proceeds to reduce the deficit in social security funding. It also raised the pension age of women by a year to 65, thereby bringing this into line with the retirement age of men. But in May a popular vote rejected the measure. And this setback to the government’s and parliament’s plans was not an aberration. Rather it was a reflection of politics, Swiss style.
“This makes it almost impossible to introduce reforms that hurt,” says Steinmann. “So when politicians contemplate a change in the law they are aware that if reforms are going to be painful it may not be possible to make them. And knowing that, they take small steps. You don’t take a big step.”
“We have to take reforms in small and separate steps,” agrees Hans-Rudolf Schuppisser, vice-director of the Association of Employers. “It may be ‘salami tactics’ but that’s how it works. It’s a case of muddling through. But we lost a step with last year’s VAT rejection. Referendums on certain issues, including those dealing with taxation, need the backing of a majority of the cantons as well as the voters, so regional divisions can make or break a policy. As a result, we have to start the reform process earlier to ensure that we have a solution when we need it. For example, at the same time as we are adopting a fourth revision of the invalidity scheme we have started discussion of a fifth in parliament. But people don’t yet see that there is a problem in the old age pension part of the scheme.”
Direct democracy, and the resulting dilution of parliamentary sovereignty, explains the tolerance of the magic formula arrangement, which by enshrining government by the same four parties appears on the surface to be undemocratic. “We don’t have a parliamentary opposition mechanism because of the peculiarities of our system,” says Enz. “The people have much greater opportunities to oppose government measures through referendums and they also have the possibility to launch initiatives. So we have a different understanding of parliamentarianism from that of many other European countries.”
The system also explains an apparent lack of discipline within political parties. “We have no dominating party on the parliament,” notes Nussbaum. “For us dominance is that alliance will form on an issue, but there will be another alliance on a separate question.”
“If you have a system with a government and an opposition, when the government says ‘yes’ the other parties have to say ‘no’ without thinking about the issue,” says Christine Egerszegi-Obrist, a vice-president of the Chamber of Deputies, in which she sits for the FDP, and president of the committee for the reform of the employee pension benefit system. “But if you have a country with four official languages and four cultures it is not possible to have a system based on a government and an opposition, you need more democracy. I love this system, because on financial questions I vote with the hardliners, because you can’t give more money than you have, but on every social question I vote with the socialists, or rather the socialists are voting with us.”
But the result is that parties tend not to have a clear line on key issues. “I wouldn’t say there is a separate CVP policy on pensions, although it is clear that we have to change some elements of the system,” says the CVP’s Wehrli. “Currently, for example, the retirement age is a very sensitive issue but this is not a question where there are differences between parties. Rather, the divide is between pension insurers and the autonomous pension funds, and throughout a year-long debate members from all parties could be found supporting both sides. There were people from my party voting for the insurers while the main part sided with the pension funds and the situation was similar in the right-wing parties.”
This ability of parties to accommodate people of different views on key issues makes it relatively easy to build coalitions. “There is a distinct line between the socialists and the other parties on the welfare system, and on the economic side there are differences between the centre-right parties, with the Christian Democrats divided between a younger and more progressive wing and the older, more conservative, members, while something similar is to be seen with the liberals, where a faction is sometimes close to the socialists,” says Nussbaum. “And this means that on certain issues the socialists have a parliamentary majority, and that was a key factor behind the parliamentary debates on pension reform.”
“We work with the socialists and the greens in parliament and are trying to forge alliances with some politicians in the centre of the political spectrum,” says Colette Nova, political secretary in the Swiss Federation of Trade Unions (SGB). “In general we want to maintain the level of social security benefits and to improve them where necessary. We don’t want to lower the retirement age, but there is an important section of the population that needs pre-retirement provision because of the strenuousness of their work. Currently those taking their first pillar pension before retirement age face a full actuarial reduction, so retiring three years early, at 62, means a loss of 20% of their benefit, and that’s too much for a worker with an average salary.
“The government had made a modest proposal in this direction, but after three years of parliamentary discussion the eventual reform included only a reduction of benefits and no move on early retirement,” she adds. “So we called a referendum to oppose the measure and received 68% of the vote and the backing of all cantons. We are still trying to introduce a pre-retirement solution, and as there is still no parliamentary majority for the move we try to call popular initiative.”

But again, small and separate steps are required. “We have learned from experience is not to introduce an initiative calling for a new benefit and at the same time outlining its source of funding,” says Nova. “If we do we invite those opposed to the measure to vote against it and those who are for it but against the funding method to also say no. So we have found that the most effect way to influence policy is to call an initiative which, if adopted by the people must be followed by parliament, and leave parliament to determine the source of funding.”
So Swiss politicians face the same problems of their European colleagues – the need to take unpopular steps, and possibly face the consequences at the next election, for a return that may not be evident for some decades – but with the additional hazard of having the policy torpedoed and having suffered opprobrium to no effect. The result, according to some observers, is drift.
The CVP, according to Nussbaum, “has no clear leadership, no dominating political personality and no profile, and has given the impression of moving from one side to the other in an opportunistic way, and this makes it not very sympathetic too the electorate.”
Enz notes the same trend in the FDP. “Under Pascal Couchepin we won’t see any meaningful reforms for two or three years,” he says. “His achievements, previously as economics minister and now as interior and social minister, have been disappointing and he has the reputation of being rather opportunistic, always looking left and right for relative majorities.”
But for the CVP’s Wehrli this is unfair. “In the Swiss system everybody has to be a little flexible,” he says “But two years ago Couchepin proposed that the retirement age be raised to 67, and his party subsequently suffered electorally for it.”
Steinmann likens this lack of influence to a Casandra effect. “Couchepin is a good example,” he says. “He called for a change of the system but realising that real reforms are not feasible, changed his strategy and his perception of what is possible.”
However, Wehrli, who was attacked by some of his CVP colleagues for saying during the last election campaign that the 7.2% conversion rate had to be reduced, feels politicians should say what needs to be said. “We need political leaders who have the courage to say ‘OK, it’s like this and we have to move this way now’ even if it costs them electorally.”
The problem for the CVP is that it has – and to the benefit of the SVP. But will the SVP’s populism have an impact on the pensions issue?
“In the short term this move to the right has not been reflected in parliamentary positions, but in the mid term I think it certainly will change something in the areas of taxation and pension contributions,” says Nussbaum.
“We are aware of the issues: people are getting older while we still have the same retirement age, but we would like to focus first on first_pillar funding,” says Aliki Panayides, SVP vice-secretary general. “Currently, there is a proposal from the left, the so-called Kosa initiative, that part of the profits from the central bank be earmarked for the first pillar and we are considering our position on this. It would buy some time at least, making the first pillar safer while we consider what should be done in the longer term. And I think we are making progress with our view that the second and third pillars are private and should be less restricted and regulated by law. Furthermore, we keep underlining that we should lower taxes to stimulate economic growth. This would help generally because the main problem in all three pillars is, after all, that we are having economic problems. It’s not only due to ageing.”
For Schuppisser of the employers’ association this is encouraging. “They are close to our position on the issue of the state pension scheme and on adapting the system to demographic developments,” he says. “Up to now they have not opposed reform measures and as I know them they wont. They are not interested in high taxes, in supplementary deductions from salaries, they want to keep the money in peoples’ pockets.”
“I don’t expect that the SVP will have a completely different roadmap on first and second pillar reforms,” says Steinmann. “But it’s worth noting that the party also has a rather large share of elderly voters and for me a more interesting question is whether in the future, especially with our direct democracy, the elderly will be a determining factor. We have computed that pretty soon those aged 55 and over will be 50% of the voting population. This is important if you assume that people of 55 are already planning their lives like someone who is retired because the major part of their remaining life will be spent in retirement. So they will be able to block whatever they don’t like.”

Have your say

You must sign in to make a comment


Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • IN-2454

    Closing date: 2018-08-01.

Begin Your Search Here