An increasing number of pension fund members opting for capital withdrawals upon retirement instead of receiving monthly pension instalments weakens pension protection in old age, a central aspect of the retirement system in Switzerland, according to Publica.
Individual members of pension schemes increasingly shoulder longevity and financial market risks when withdrawing capital upon retirement, Publica said.
The protection against risks that a pension fund offers does not apply to the share of retirement savings withdrawn as capital, the pension scheme added.
For this reason, the Swiss pension fund association, ASIP, has warned of the long-term socio-political consequences of increasing pension fund members’ withdrawing capital as lump sums.
Publica, one of the largest Swiss pension schemes with over CHF40bn (€42.6bn) in total assets, has published the study Rente oder Kapital? (Pension or capital?), concluding that capital withdrawals of pension scheme members jumped by 300% in the period 2013-2022 to CHF335m in total.
The share of Publica’s members withdrawing their entire retirement savings as capital has sharply increased from 5% to 21% during the period 2013-2022. The average share of capital withdrawn relative to the entire retirement savings rose from 12% to 33% during the period, according to the study.
The trend towards capital withdrawals has accelerated, particularly since 2019, and for people that have set aside relatively small retirement savings, it added.
Capital withdrawals upon retirement are becoming increasingly important throughout Switzerland, Publica said in the final remarks to the study, adding that it can influence only some of the reasons why members choose to take out benefits in one go.
Members surveyed by Publica mentioned lower pensions resulting from the reduction of the conversion rate used to calculate pension pay-outs as a reason for a capital withdrawal, alongside tax considerations, the need for liquidity upon retirement, and a desire to implement their own investment strategy.
Publica has cut the conversion rate three times in the last 12 years, in 2012, 2015 and 2019, to 5.09%, in line with a general trend that has seen conversion rates applied by pension funds declining over the years.
A tendency to opt for capital pension withdrawals is also the result of a changing pension funds market, according to Publica. Members increasingly seek advice to manage retirement savings themselves, also through new solutions offered by providers or consultancies.
This means that future pension funds adopting a good members’ information policy will become even more important, Publica said.
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