Falling pensions

Falling Conversion Rates Significantly Reduce Pensions

There is less money for old age than there used to be, since pension funds are no longer earning sufficient returns due to demographic change and the low interest rate environment. Despite reforms, pensions continue to fall, and private pension provision is becoming increasingly important. 

The Swiss Confederation of Trade Unions (SGB) is sounding the alarm. Many of those retiring now must be content with a lower pension than before. In the last seven years, ten of the largest Swiss pension funds have reduced their conversion rates for the extra-mandatory portion of the 2nd pillar retirement capital by an average of over 10% – in some cases, even as much as 20%. And the trend isn't over yet. This will result in pension losses for future retirees.

Extra-mandatory benefits with high losses

The losses will be especially severe for everyone receiving extra-mandatory benefits. For the SGB, the matter is clear: This is "pension theft." The union phrased it as such at a media conference this year. At that event, they presented the results of their investigation of the pension promises of the largest Swiss pension funds and came to the conclusion that backtracking is necessary when it comes to the question of future pension benefits. The amount of the pension from the 2nd pillar is primarily determined by the conversion rate. This specifies what percentage of the accrued retirement capital will be paid out each year as pension benefits. The higher the conversion rate, the higher the pension.

Drastically Reduced Pension 

Compared to the statutory BVG insurance with a conversion rate of 6.8%, the extra-mandatory portion is already being calculated with a rate of 5.7% and less. For the insured, this difference results in a reduction in pensions of around CHF 2 billion per year.

Source: "ECO" broadcast of 22.2.2016, SRF 

Drastically Reduced Pension

Lower conversion rates

Mandatory insurance only covers annual salaries between 21,330 and 85,320 Swiss francs. Capital saved from that is paid out at the statutory conversion rate, currently 6.8%, as a pension. For retirement capital falling under the extra-mandatory insurance, pension funds can set conversion rates themselves. This is often substantially lower than the rate for mandatory benefits. An example: Someone with 700,000 francs of accrued retirement capital in the 2nd pillar with a conversion rate of 6.2% will be paid a monthly pension of 3,617 francs. If we assume the conversion rate falls to 4.8%, then that amount will be reduced to just 2,800 francs. This is equivalent to a 23% reduction of pension benefits.  

Significant Differences 

What monthly pension can you expect if you have CHF 700,000 in retirement capital in the 2nd pillar, paid out with different conversion rates (in CHF).

Source: Credit Suisse 

Significant Differences

Increasing life expectancy, declining investment income

Reductions in conversion rates have become necessary due to difficulties encountered by the 2nd pillar system. Life expectancy is increasing, and capital market returns have been declining for years. In order to manage higher conversion rates sustainably, pension funds would need to achieve annual capital returns of 5% – but this is essentially no longer possible. In view of the current economic situation, it seems unlikely that this will change in the near future. Further reductions of conversion rates can be expected.

Development of Conversion Rate since 2002

Conversion rate, men with pension age 65, in percent
Source: Swisscanto

Development of Conversion Rate since 2002