Another look

Adam Cadle reports on the second wave of pension reform proposals in four years for Switzerland

Longevity is wreaking havoc across Europe. With the baby boomer generations living longer, countries are increasingly having to make changes and implement reforms to ease the strain on their finances and social security systems. Switzerland is not immune to this issue. In March 2010, reforms were put forward targeting the second pillar but almost 73 per cent of Swiss voters rejected a proposal in a referendum to cut the conversion rate from 6.8 per cent to 6.4 per cent, openly displaying their discontent at the measures. Four years on and another set of reforms are being considered.


The Swiss pension system is one of the best in the world. It achieved an overall pension index grade of 73.9 and a pension system with a ‘sound structure’ according to the 2013 Melbourne Mercer Global Pension Index.

A pay-as-you-go system (first pillar) is complemented by mandatory occupational pension plans under federal law (BVG/LLP) which form the second pillar. Individual savings and insurance constitute the third. However, the system is not sustainable on a funding basis and a reform package has been put forward by Interior Minister Alain Berset to address the situation in a more comprehensive manner compared to other years.

Current measures mooted by Berset involve both the first and second pillar pension systems. The old-age dependency ratio in Switzerland is set to increase to 49 per cent in 2060, up from 25 per cent in 2010. Berset, as part of the Pensions 2020 reforms, plans to lower the conversion rate from 6.8 per cent to 6.0 per cent, a move which has caused uproar among unions. According to Swisscanto’s certified pensions actuary Heinrich Flückiger pension contributions will increase. “Until now, the mandatory contributions for people aged 25 to 34 is 7 per cent. This would remain the same,” he says. “For people aged 35 to 44 contributions would increase from 10 to 11.5 per cent, for people aged 45 to 54 values would increase from 15 per cent to 17.5 per cent and for those aged over 55, it would also be 17.5 per cent. In total it would amount to 35 per cent more in savings over 40 years.”

Furthermore, as part of the proposed reforms, the government is looking to increase the retirement age for women from 64 to 65, equal that of men. Women’s organisations are questioning this harmonisation in retirement ages as they argue they still earn significantly less than men for doing the same jobs. An increase in Value Added Tax by up to 2 per cent is also being considered. VAT in Switzerland is only 8 per cent, significantly less than its European counterparts.

According to the Federal Social Insurance Office (BSV), the capital reserves of the AHV will decrease continuously from 2020. In the first pillar pension system, there is an expected shortfall of CHF 30 billion by 2030, and to improve and avoid this funding gap, the BSV predicts today’s retirement age will have to be raised by three years. The draft proposal for reforms has been released and now a public consultation period is underway where people can comment on the first draft.

“It was emphasised in the explanatory notes to the draft proposal that studies have shown there is no labour market for people above 65 so there should be no discussion about further increasing the retirement age at this point in time,” Towers Watson consultant Simon Heim says. “This needs to be questioned. A retirement age of 65 cannot be the end of the story. If the Parliament approves the Bill then chances of a referendum are high. It will be interesting to see what the Swiss people decide on this issue. Although the reform package is a good thing and it is reasonable, I have some doubts about whether these reforms will go through,” Heim adds.

Aon Hewitt managing director in Switzerland Werner Hertzog agrees. “In reality the Swiss population doesn’t understand why we should have a reform of the current system. At the moment it’s only a political project with a high potential for failure.”


While the Swiss population and pension fund members grapple with the changing pension landscape surrounding them, the environment in which the funds find themselves in is a little more rosy and stable.

Swiss pension funds returned 6.25 per cent on average last year with equities being the main driver according to ASIP, the Swiss pension fund association. It was the third best result for Swiss pension funds since the 2008 financial crisis. This improvement allowed funds to rebuild reserves and provisions. According to ASIP, pension funds with riskier investment strategies and higher than average equity allocations managed to return more than 10 per cent in 2013. Domestic equity exposure ranged from 3 per cent to 20 per cent, while foreign equity exposure ranged from 6 per cent to 42 per cent. Swisscanto’s chief economist Thomas Liebi says there has been a shift in investment strategy.

“The coverage ratio for private funds is now almost 111 per cent with the estimate being 110.8 per cent. The coverage ratio for public funds with the state guarantee increased from 73.7 per cent to 76.4 per cent in 2013. We are now in an environment with historically low interest rates. The 10-year yield at the end of 2012 was about 0.5 per cent and now it’s about 1 per cent. That has hit pension funds, but on the other side we also had a really good stock market. Since bond prices have fallen and stock markets have risen, that has increased allocations towards equity.”

Liebi mentions that with coverage ratios increasing pension funds now have that ‘buffer’ allowing them to take a bit more risk. “I don’t think there will be a lot more active increasing in equity risk but a lot of pension funds will keep the fraction they have which is higher than last year,” he adds.

The BVK pension fund for the employees of the Canton of Zurich also experienced a positive performance in 2013. The fund, which has 110,000 active policyholders and pension recipients of supplementary benefits, saw its coverage ratio increase to 96.1 per cent in 2013 due to an above average performance of 7.4 per cent. The fund outperformed its benchmark by 80 basis points.


The situation in Switzerland demonstrates the point that nothing is untouchable and the government recognises that it must do all it can to persuade the Swiss public to accept that reforms are needed to ride the demographic tidal wave. Swiss pension experts believe that the longer pension reforms are postponed, the greater the impact on future generations and have emphasised that unfunded public pension systems can pose political risks, particularly if pension payment promises to future retirees cannot be met. Debate continues to gather pace about the earliest retirement age for occupational pension plans also. As ASIP director Hanspeter Konrad notes “the ASIP refuses the increase in the threshold of 58 as the earliest retirement age for occupational plans to 62 as it is a restriction of the freedom of discretion among social partners”.

Written by Adam Cadle

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