Switzerland looks set to cut minimum rate for pension funds

Switzerland’s BVG Kommission, responsible for amending technical parameters within the second-pillar pension system, has proposed cutting the minimum interest rate for Pensionskassen from 1.75% to 1.25%.

The news means Pensionskassen, from January 2016, look set to employ the 1.25% rate when guaranteeing members’ assets, as the Swiss government has to date followed all of the commission’s recommendations.

In a statement, the BVG noted that, in its final vote, the majority of commission members supported the 1.25% rate, as opposed to the more radical 1% rate. 

The minimum interest rate, which must be applied to all mandatory contributions made to the second pillar, is based on the returns from Swiss government bonds.

Depending on which period is used as a basis for the calculations, 1.25% could be a maximum, or a realistic, rate.

This is, however, merely the minimum interest that must be guaranteed on mandatory assets of active members, while Pensionskassen are free to pay out more.

In 2014, the actual interest paid out on members’ assets stood at 2.3% on average, up from 2% the year before and just under 2% in 2012, while the legal minimum rate has fallen continually in recent years.

A recent study by PPCmetrics (in German) shows that just over half of all Pensionskasse surveyed paid out an interest rate of 1.5-2%. 

One-quarter had a rate higher than 2.5%, while approximately 7% fell below the 1.5% threshold.

The Swiss consultancy based its research on the balance sheets of 260 Pensionskassen, with combined assets of CHF565bn (€461bn), with approximately CHF200bn attributable to public pension funds.  

The PPCmetrics study, unlike most others on the technical parameters for Swiss Pensionskassen, was based not on surveys but reported figures.

The consultancy said this made its figures more comparable.

According to the research, the so-called ‘technische Zins’ – the discount rate applied – has decreased by less than the average return from bond holdings, particularly in public pension funds.

This means the average risk-adjusted funding ratio, a benchmark figure devised by PPCmetrics, has deteriorated from just over 101% in 2013 to 99.7% last year.