Pension Fund Study: Low Interest Rates and Redistribution Are Putting Pressure to Act
Credit Suisse has conducted a survey of nearly 200 Swiss pension funds. The greatest challenge named by participants continues to be the prevailing low interest rate environment. Demographic change and an excessive minimum conversion rate also rank among the main concerns of pension funds.
In their new study, "Swiss Pension Fund Survey – Low Interest Rates and Demographics as Central Challenges," the economists and strategic advisors for institutional clients of Credit Suisse take a closer look at employee benefits insurance. The study is based on a survey conducted in October/November 2016, in which nearly 200 pension fund managers participated. As was previously the case in Credit Suisse pension fund surveys in 2011 and 2014, the most frequently mentioned challenge was the prevailing low interest rate environment. 93 percent of survey participants indicated that this was one of the three most important problems, and more than half described it as their greatest challenge. For just under 60 percent, the three main concerns also included the minimum conversion rate and demographic change. "Increasing life expectancies and performance pressure are forcing pension funds to adopt measures on both the benefits side and the investment side," says Beat Zeller, Head of Pension Funds & Corporate Investors at Credit Suisse.
Redistribution of 5.3 Billion Francs between the Active Insured and Pension Recipients
Since the parameters of the 2nd pillar employee benefits insurance have not been adjusted to meet the new demographic and economic framework conditions, or have been adjusted too slowly, the system has become financially unbalanced. Among other things, the excessively high conversion rates and technical interest rates are leading to an unintended redistribution within the 2nd pillar, from the active insured to pension recipients. Based on the findings of the 2016 pension fund survey, the economists of Credit Suisse estimate that this redistribution amounted to approximately 5.3 billion francs in 2015. This indicates that the redistribution issue has intensified in recent years. An earlier estimate by Credit Suisse assumed a redistribution of 3.5 billion francs for the year 2010.
Without Measures in Response, the Redistribution Would Be Approximately 4 Billion Francs Higher
Respectively, 93 percent and 82 percent of surveyed pension funds confirmed having raised their technical interest rate and/or their conversion rates in the previous five years. According to the survey, the average technical interest rate applied in 2015 amounted to 2.5 percent, whereas it had still amounted to 3.5 percent in 2010. In parallel with this, the average applied conversion rate of 6.8 percent in 2010 fell to 6.2 percent (men) and 6.1 percent (women) respectively in 2015. However, at the majority of pension funds, the conversion rates applied in 2015 still lay above the actuarially correct figure, which is in the region of 5 percent according to pension fund experts. The authors of the study estimate that thanks to these reductions, it was nevertheless possible to prevent further redistribution in an amount of approximately 4 billion francs in 2015. With a view to development in the next five years, 92 percent and 87 percent of surveyed pension funds stated at the end of 2016 that they had either already resolved or begun considering a decrease of the technical interest rate or their conversion rates, respectively. On average, they are pursuing a technical interest rate of 2 percent and a conversion rate of 5.5 percent.
For Many, "Pensions 2020" Does Not Go Far Enough
Pension funds are partially restricted by regulation with regard to the determination of the conversion rate: For the mandatory BVG portion, they are currently bound to a minimum conversion rate of 6.8 percent. Unsurprisingly, 94 percent of the surveyed pension funds supported the reduction of the minimum conversion rate to 6 percent as planned in the "Pensions 2020" pension reform. However, a majority of survey participants also perceived a more extensive need for action concerning the measures set out for the 2nd pillar in the "Pensions 2020" proposal. Participants desired further adjustments, especially regarding the minimum conversion rate, and above all a depoliticization of its determination. The increase of the retirement age above 65, the current lack of a possibility to adjust annuities in payments, and the elimination of the minimum interest rate are also topics on which a number of pension funds desire further political debate.
The study also shows how pension funds have adjusted their investment strategies in response to the low interest rate environment. In addition, the authors also use simulations to show how the future development of the technical interest rate could look. To conclude, they explore the significance of the second pillar to the financial situation of Swiss people in old age, and how societal trends such as the increasing proliferation of part-time work are putting Switzerland's current pension system to the test.