Keep Second Pillar Simple Says Swiss BVK

Variable pension payouts and enforced lump sum payouts are detrimental to the sustainability of Switzerland’s second pillar system, according to the chairman of one of the country’s largest pension funds.

Thomas Schönbächler, chairman of the board at the CHF33bn (€27bn) BVK Pensionskasse, voiced his concerns at the annual conference of the regional supervisory authority for Zurich, the BVS, last week.

Schönbächler said he “would be very careful about introducing variable pension payouts” as this would lead to too much uncertainty and complexity.

“Rather keep the Pensionskassen as simple as possible and calculate pension levels we are sure we can pay out given the expected life expectancy,” he stressed.

Mirjam Staub-Bisang, president of the board of trustees at Profond, was also cautious when it came to variable pension payouts, saying: “People want certainty and security in their retirement income.”

She added: “We are looking after our clients but they have to stay in the herd.”

Other delegates were less opposed to the measures – or, regarding some points, even in favour – but the heated debate illustrated a divide in the Swiss second pillar on topics such as individual choice and future pension promises.

Differing models

At BVK, a model was introduced that allows for top-up payments in good times and to compensate for lower conversion rates in newer contracts.

Since the start of this year, savers in the BVK have been able to choose whether they want a higher conversion rate, giving them higher pensions at the start of their retirement.

BVK lost 3.5% on its investments last year, which was “right on the benchmark”, the fund noted in a press release – and also in line with the market average. Despite this, it must still pay a minimum pension increase of 1%.

Elsewhere, the CHF7.5bn multi-employer pension fund Profond said it would use some of its buffers to grant a 1.5% increase, compared to the 1% legal minimum. This was despite its 2018 investment loss of 4.2%.

Collective pension funds such as Profond have to compete on the open market – more so than other Swiss Pensionskassen. Its ability to grant above-average increases has proven a competitive advantage in the market. 

Profond is also free to offer a higher conversion rate than other funds, meaning it can choose new entries to balance out existing pensioners with companies that have a lot of active members.

“We get so many requests for joining that we had to cap the number of new entries last year,” said Profond’s Staub-Bisang.

She added the Pensionskasse was financially stable and never had to increase contributions to finance recovery measures.

Minimum conversion rate

Martin Wagner, manager of Credit Suisse’s CHF17bn pension fund, said there should be more choice for pension funds, for example regarding the minimum conversion rate.

“Pension funds should decide with less intervention from politicians,” he said.

For years, the conversion rate – applied to the mandatory part of accrued assets – has been kept at 6.8%. This is at least 20% too high, as experts in the Swiss second pillar sector would agree, Wagner said.

The Credit Suisse fund’s conversion rate is lower compared to many other Swiss funds, and is being reduced gradually to 4.87% by 2025.

Lump sums

Additionally, retirees have to withdraw a lump sum payment for contributions paid from salary components above CHF128,000, with no annuities offered on this portion.

“The board of trustees decided to accept possible lower pension payouts to keep the strong financial backing by the employer,” Wagner said.

Credit Suisse recently launched the Credit Suisse Collective Foundation 1e, which offers companies and self-employed people in Switzerland the opportunity to structure their extra-mandatory retirement plan on an autonomous basis.

Wagner was convinced this additional feature “makes sense for some industries”, but it was only applicable to between 5% and 7% of the working population in Switzerland.

Schönbächler added that, given their higher income, these people accounted for up to 30% of the accrued assets in Pensionskassen.

“Many pension funds already have too little capital to be fully funded, and taking a part of it out for individual investment strategies makes their situation more difficult,” he said.

He also questioned whether a separation of the portfolio could lead to lower returns overall and therefore require adjustments to the overall technical parameters in a fund.