“When It Comes to Pension Provision, We Can't Wait”
After the "No" vote to AHV reform, dealing with this issue is everyone's responsibility, not just the government's. Uncertainty about one's own retirement provision is growing. But there are certainly opportunities. During their conversation, Antonio Gatti, Head of Wealth Planning at Credit Suisse in Zurich, and economic author Reto Schlatter explain what these are.
Schlatter: Last fall, the public said no to the AHV reform. In doing so, we have reached a standstill regarding the retirement provision reform.
Gatti: When one vote ends, the next is just around the corner. By that I mean: for all those who are slowly but surely moving towards retirement, the topic of pension provision is now becoming even more important. We are healthier, we are more active in old age, and we are living longer. And of course, we want to enjoy retirement for as long as, and as much as, possible.
Schlatter: Fair enough. But all of that comes at a price. The flip side is the fact that retirement is becoming more and more expensive.
Gatti: That's true. We all need to be aware that the current pension systems will not be able to provide more in the future. There are two reasons for this: The persistent low interest rate situation on the financial markets and demographic development. We are therefore forced to save more ourselves.
Schlatter: The government is not making it easy for us citizens. It hasn't done its homework with regard to reforming the AHV and second pillar pension systems. The consequence is that we have to take care of adequate financing for our old age ourselves.
Gatti: The importance of private pension provision is increasing, since the reliability of state and occupational pensions is decreasing. Actually, everyone knows that the 2020 reform package was too comprehensive, contained too many sensitive components and offered too many question marks, which is why it ultimately failed. Now it's about setting our sights lower, and tackling the reform step by step.
Schlatter: There's not much time, particularly when it comes to the AHV. Without a reform, AHV losses will increase rapidly from year to year: By 2022, it will be a few hundred million Swiss francs a year, after which the annual losses go into the billions.
Gatti: Switzerland cannot afford such scenarios. It would hit the economy, and indeed the whole of society, massively. The legislature is facing enormous challenges. On the one hand, it must ensure that the individual pillars are stably financed again. And on the other, it must not abandon the flexibility of the system.
Schlatter: Another complicating factor is the increasing aging population in our society. The number of people over 65 is growing dramatically, from 1.5 million today to 2.7 million by 2045.
Gatti: And at the same time, life expectancy is steadily rising. 65-year-olds today still live another 20 years on average. Thanks to medical advances, life expectancy increases by another one or two years every ten years. As a consequence, life expectancy could be 90 in the foreseeable future. Thus, the problem of AHV and pension funds is even further accentuated.
Many of us are somewhat naive when it comes to our own pension provision.
Reto Schlatter, economic author
Schlatter: The state should have an interest in making private retirement savings more attractive.
Gatti: That would be very easy for the third pillar, i.e. private pension provision. The annual amount that can be deducted from taxes is currently 6,768 Swiss francs. That amount could increase to 10,000 Swiss francs, for example. This would increase the incentive to privately set aside money for retirement. It would also be useful to allow depositing into the 3a account in the case of a temporary work absence, such as maternity leave.
Schlatter: The topic of pension provision is complex. Many citizens only know a little about the how, the when and the how much when it comes to their own pension provision. It is astonishing that in Switzerland, more than 40 percent are prematurely stopping the decision-making process for private retirement provision. This was the result of a study by the Zurich University of Applied Sciences (ZHAW). Probably many of us are a little naive when it comes to our own financial security in old age.
Gatti: The reason for this is probably that today's retirees could retire in a relatively carefree way. This generation could fully rely on the three-pillar system. But this is ending now. When the baby boomers get to retirement age, they will no longer be able to rely on this system. This can be seen in concrete terms in the development of the conversion rate.
Schlatter: Only a few years ago, the conversion rate was at seven percent; now we are often at around five percent. For people with 100,000 Swiss francs in the second pillar, the figure is 5,000 francs per year instead of 7,000. Relying on the second pillar could likewise backfire.
Gatti: Losses in the second pillar are dramatic and cannot be mentioned often enough. Because when the baby boomers retire, they especially rely on the second pillar. The lower conversion rate means 20 to 25 percent less pension for them.
Schlatter: The logical consequence would be cutting consumption...
Gatti: ...which nobody really wants.
Schlatter: What is left?
Gatti: Increasing our private pension provision. The motto must be: Save while you can, then you'll have it in an emergency. In good economic years, contributions should be put to one side. First, by paying into the third pillar, but also by voluntary purchases in the pension fund. These can also be deducted from taxable income. And last but not least is the fourth pillar, the free saving of securities. It is not always possible to win with shares, but maybe in time.
Schlatter: Thinking about the four pillars of pension provision makes sense, not least because savings accounts no longer generate returns. The persistent low interest rate situation on the capital markets is having a full impact on citizens. So it is even more important for each of us to think about a personal retirement plan.
The ideal decision is almost always a mix between a pension and a lump sum.
Antonio Gatti, Head of Wealth Planning at Credit Suisse, Zurich
Gatti: If you want to set up a sensible retirement plan, the sooner, the better. You should give it some serious thought by age 50, at the latest. Now there is also the option of 1e pension fund plans if your income is higher than 126,900 Swiss francs. You can take more or fewer risks here depending on your investment horizon and strategy. And save more over the entire life cycle.
Schlatter: The pension plan is one thing; retirement is the other. The most important monetary decision in life usually doesn't come at age 50, but at 65, when retirement begins. The question is: a pension or a lump-sum withdrawal. Opinions differ on this matter; there is no universal answer to this question.
Gatti: It's true there is no general right or wrong, but only an individual right or wrong. The two extremes – only a pension or only a lump sum – are often not the best decision. The ideal choice for the vast majority of our clients is almost always a mix between a pension and a lump sum.
Schlatter: Another aspect of retirement is also not insignificant. Indeed, it is a good idea to take a look at the tax payable if you want to withdraw part or all of your pension assets. Depending on the place of residence, the tax bill can be pretty steep.
Gatti: All the cantons around the canton of Zurich have significantly lower tax rates when it comes to the payout of retirement capital. Most even have a flat tax, so there is no progression. In contrast, the canton of Zurich has the steepest progression and the highest tax rates for the withdrawal of retirement capital.
Schlatter: Let's come back to the topic of AHV. After the discussion in the last few months about a difference of 70 Swiss francs in our pensions, I have the impression that in Switzerland we are systematically avoiding answering one question: What retirement age can we afford and do we want in Switzerland? 18 OECD countries have already decided on or introduced a retirement age of 67 or 68. Despite the fact that these countries – apart from Spain – have a lower life expectancy than Switzerland. For example, in Germany the age of retirement is 67 for those born in 1964. We are still at 65/64.
Gatti: When it comes to pension provision, we can't wait until the state has made the necessary reforms. Its funds are limited and the plans are highly complex, as the last AHV vote demonstrated. The long interval between one AHV revision and the next shows that such reforms may come too late for some people. That's why we have to take pension provision into our own hands and not leave it to the state.