Re­tire­ment pro­vi­sion

On 23 June 2021, the Federal Council adopted the 2030 Sustainable Development Strategy (2030 SDS). In national strategic pillar (f) ‘Ensuring the long-term stability of retirement pension systems’, it states:

‘The financial stability of Switzerland’s retirement pension systems is secure despite demographic trends. The Confederation ensures that the reforms proposed in order to secure the financial balance of retirement pension systems while preserving social protection take due account of the interests of all age groups and safeguard the intergenerational contract. The supreme authority of each social insurance institution is responsible for its investment policy. The Federal Council supports pension plans in their efforts to be mindful also of the goals of the Paris Climate Agreement in managing pension capital.’

This not only addresses the environmental dimension of pension-related sustainability (being mindful of the goals of the Paris Climate Agreement in investing pension capital), but also the financial and social dimensions that are inextricably linked to this (ensuring the financial stability of the pension system.

In terms of sustainable development, this means that one generation cannot live beyond its financial means, as this inevitably translates into losses for future generations. When it comes to pension provision, this is expressed succinctly with the term ‘intergenerational equity’.

The law pays almost no heed to intergenerational equity in occupational pension provision. The excessively high conversion rate set by the Occupational Pensions Act (OPA) causes huge pension conversion losses for pension funds, leading to pressure from outside the system for redistribution from active insured persons to pensioners.

Taken together with the strengthening of the actuarial reserves of current pensions due to lower technical interest rates and the longer periods over which pensions are drawn, the Occupational Pension Supervisory Commission (OPSC) estimates that financing the pension conversion losses results in a redistribution of around CHF 6.3 billion per year, averaged over five years (2016–2020). This includes pension conversion losses of around CHF 1.4 billion per year.

‘Incorporating comprehensive sustainability criteria into retirement provision, and in a way that addresses intergenerational equity, is reasonable and improves credibility.’ 

Alice Balmer, Co-Head of Sustainability Research at Forma Futura

Pension conversion losses are being reduced because the OPA reform contains provisions on lowering the OPA conversion rate from 6.8 to 6 per cent. It will also be possible to fund any further losses transparently with the introduction of a contribution to compensate for pension conversion losses (Article 17 para. 2 (g) Vested Benefits Act, VBA) and a corresponding premium (Article 37 para. 2 (b) Insurance Oversight Act, IOA).

Private life insurance providers have always been heavily involved in occupational pension provision. As at end-2020, insurance companies supervised by Finma insured 250,000 SMEs with 1,865,000 employees (out of a total of 4,401,000 people covered by occupational pensions).

This breaks down into around 115,000 SMEs with 726,000 employees which had full insurance, and around 135,000 SMEs with 1,139,000 employees which had risk insurance, most commonly under semi-autonomous collective models⁴.

As at end-2020, insurance companies supervised by Finma insured 250,000 SMEs with 1,865,000 employees (out of a total of 4,401,000 people covered by occupational pensions).

There currently remain five private life insurers that offer full insurance solutions, after all other companies withdrew from this business area due to an increasingly challenging environment.

The last few years have seen hardly any change in the number of people covered by private life insurers as part of occupational pension provision. However, there is evidence of a huge shift away from full insurance towards risk insurance. Between 2016 and 2020, the number of people actively insured by full insurance collective foundations fell by around a third, while the number of people covered by semi-autonomous collective foundations more than doubled over the same period⁵.

In group life insurance, private life insurance providers managed investments totalling CHF 186 billion as at end-2020⁶. For information about the investment of these funds, see section 7 ‘Investment’ of this sustainability report.

The semi-autonomous collective foundations set up by private life insurers held assets of over CHF 60 billion at end-2020. Each institution’s board of trustees sets the pension scheme’s investment strategy. Life insurance providers play a key role in the investment of pension capital and help these collective foundations to be rated relatively well for sustainability (see the rating from Klimaallianz Schweiz, for instance).

The full insurance solutions offered by life insurers have always been based on the split model. This means that retirement assets from both mandatory OPA retirement savings and supplementary retirement savings are managed for every insured person. To calculate the old-age pension (including survivor’s pension entitlements), the former is multiplied by the OPA conversion rate and the latter by an actuarial conversion rate, and the two part-pensions are then added together.

The scale of insured persons’ losses through pension conversion depends mainly on the value of the retirement assets and the conversion rates, the age structure of the portfolio in question and the withdrawal rate.

To limit pension conversion losses in the interests of existing customers, full insurance providers have for years been subject to restrictions on the age structure of new affiliations. In practice this means that in many cases SMEs with a high proportion of older employees can no longer negotiate full insurance solutions.

Another measure announced by the full insurance providers was the application of the imputation principle in the split model (‘modified split model’), which they have partially implemented. In this model, the regulatory conversion rates on mandatory retirement savings are lower than the OPA conversion rates, currently 6.5 or 6.2 per cent, for example. There is an actuarial conversion rate of 4.5 per cent, for example, for supplementary retirement savings.

The lack of generational equity in occupational pension provisions does not just have a long-term negative impact and affect future generations.

The regulatory pension is calculated by multiplying the mandatory and supplementary retirement savings by the applicable conversion rate for each and adding the two part-pensions together. This approach is permissible under the imputation principle provided that it results in a higher pension than the product of multiplying the OPA retirement savings by the OPA conversion rate. If this is not the case, the benefit must be brought at least into line with the OPA. Pensions already being drawn are not affected by this change.

The lack of generational equity in occupational pension provisions does not just have a long-term negative impact and affect future generations. The unavoidable remedial measures put in place by life insurers will also bring short-term disadvantages that impact people who are currently insured, as solutions become more complex or products are withdrawn.

⁴ Sources: Swiss Federal Statistical Office, pension fund statistics 2020; Finma, ‘Operating statement of occupational pension schemes 2020’

⁵ Source: VPS, index of collective and cooperative foundations

⁶ Source: Finma, ‘Operating statement of occupational pension schemes’ 2020