The Swiss occupational pensions supervisory commission — OAK BV — has revised the definition of improved benefits in multi-employer pension funds after hefty criticism from the second pillar industry.
In a note published this week, OAK BV specified when an interest on retirement savings does or does not qualify as improved benefit according to second pillar rules.
Interest on retirement savings of pension fund members still actively working are not considered a benefit improvement if they are lower or equal to the “upper limit” published by OAK BV every year in the first half of October, it added.
The upper limit is defined as a mix of market interest rate, the yield of 10-year Swiss bonds of the last 12 months, and current average return, above the market interest rate, OAK BV said.
According to OAK BV’s formula, two-thirds of the average returns above the market interest rate are available to amass fluctuation reserves, and one-third is used for interest rates on pension savings, meaning that pension funds can apply an interest rate well above the minimum set at 1.25% also for next year, according to the supervisory commission.
OAK BV has put a limit of 2.5 percentage points above the market interest rate for the “over-performance” it said, to prevent pension funds that have not yet built up sufficient fluctuation reserves from excessively high interest rates.
Second pillar rules in Switzerland refer generally to improved benefits that may only be granted by pension schemes setting aside at least 75% of the total reserves to fend off market fluctuations.
Many pension funds base their interest rate decisions to bump up benefits on funding ratios and returns. It makes sense for OAK BV to consider the past short-term performance – the chosen rule takes 12 months into account – for the definition of improved benefits.
The question of whether or not a pension fund is subject to the limits specified by the supervisory commission depends also, largely, on “technical interest rate” parameters, it said.
Inter-pension, the organisation representing the interests of Swiss multi-employer pension schemes, has again criticised the supervisory commission, saying that the upper limit “is not based on the reality” that pension funds face, noting that interest on retirement savings may be below the amount of the technical interest rate, and considering the 2.5% percentage point limit for the over performance “arbitrary”, it said.
The latest digital edition of IPE’s magazine is now available
No comments yet