Retirement provision

27 May 2021

Generally speaking, a way of doing business is considered sustainable if it can continue in the long term (GRI 103-1). From an economic perspective, this means that a society cannot live beyond its financial means, as this inevitably translates into losses for future generations.

In the context of the pension system, the term intergenerational equity is often used instead of sustainability. The terms ‘generation’ and ‘equity’ contained therein provide a brief and succinct definition of sustainability in this area: a generation cannot exploit services to the detriment of following generations.

Thanks to its three-pillar system, the Swiss pension system was for decades considered the gold standard in an international comparison. In recent years, however, Switzerland has fallen further and further behind. This is due in particular to the lack of sustainability: the ongoing reform backlog means that central parameters are outdated, and make the first and second pillars unstable.

The statutory framework has not kept pace with the increasing life expectancy in society at large. The standard retirement age for men has been 65 since its introduction in 1948. Then, an old-age pension was paid out for an average of 12-13 years; today, pensions are paid out for 21 years on average – a figure that is still rising. The rigid retirement age means that the higher life expectancy is fully reflected in a longer pension payment period. Despite its high levels of life expectancy, Switzerland is one of the few countries in Europe that has not increased its retirement age, or even seriously considered this step.

More than half of OECD countries have adopted a retirement age of 67 or above, many with significantly lower life expectancy levels than Switzerland.

In the first pillar (OASI), which is financed on a pay-as-you-go basis, the longer pension payment period combined with the steadily decreasing number of contributors per pension recipient leads to an ever-mounting financial burden on the employed. In 1948, more than six working people financed one pensioner; today, there are just over three. In three decades’ time, according to the federal government’s forecast, there will be about two. The system is faced with significant financing problems, which will become even worse over the next 10 years as the baby boomer generation nears retirement.

In the second pillar (OPA), in which retirement benefits are financed as part of a funded scheme, the excessive conversion rate has resulted in a massive non-systemic redistribution due to increased life expectancy and lower interest rates. Funds are redistributed from the active insured to pensioners in the amount of about CHF 7 billion a year. The redistribution reduces the interest on the retirement assets of the active insured, thus reducing their future retirement benefits.

With this situation in mind, the Federal Council submitted its draft Sustainable Development Strategy 2030 for consultation on 4 November 2020. In national strategic pillar (f) ‘Securing the stability of pension systems in the long term’, the government states:

‘The financial stability of Switzerland’s pension systems will be ensured despite the demographic trend. The federal government will ensure that the proposed reforms to ensure the financial equilibrium of pension systems, while maintaining social protection, consider the interests of all age groups and respect the intergenerational contract.’

It has been common knowledge for some time that the first and second pillars of the pension system are not sustainable, and it is clear the measures that must be taken. In the country report 2019 from the Organisation for Economic Co-operation and Development (OECD), the international experts recommended the following measures for Switzerland:

Fix the retirement age at 65 for both sexes as planned, then raise it gradually to 67 and thereafter link it to life expectancy.
Lower the parameter used to calculate annuities (‘minimum conversion rate’) and make it a more flexible technical parameter set by ordinance.
Use the existing annual conference on older workers to find ways to introduce greater flexibility into the salary-setting system and decouple it from seniority.
Flatten the age-related increase in retirement credits in the second pillar.
Allow workers to compensate for gaps in their pension rights through contributions after the age of 65.

It is imperative that the pension system is reformed as a matter of urgency (GRI 103-2). From the SIA’s perspective, steps to stabilise the OASI and OPA systems must be taken and implemented as quickly as possible, while maintaining the overall view. To the extent that it is compatible with the objective of stabilisation, adjustments can and should also be made to reflect changing needs in the interests of modernisation.

In the current OASI reform (‘OASI 21’), this means specifically:

Reference age of 65 for women and men
Increase in VAT by 0.3 percentage points

The following measures are planned or required in the OPA reform also underway:

Reduction in the OPA conversion rate to 6.0 per cent
Introduction of a contribution to finance compensation for pension conversion losses
Measures for the transitional generation
Better provision for low-income earners and part-time employees (in particular women)
Flatter progression of retirement credits

In addition to these stabilisation and modernisation steps, further reforms to make the OASI and OPA systems sustainable are inevitable (GRI 103-2). The SIA has pointed out for years that if this objective is to be achieved, the central parameters (reference retirement age, OPA conversion rate, OPA minimum interest rate) must reflect real-life circumstances. It welcomes and supports policy proposals with the following objectives:

Linking the reference age to life expectancy
Securing a balance between contributions and benefits in OASI
Economically correct conversion and interest rates in OPA
Additional incentives in favour of private pensions