Thomas Jordan, chair of the governing board of the Swiss National Bank (SNB), has defended the bank’s policy to keep negative interest rates in front of an audience of pension fund trustees, saying it would not be in pension funds’ interest to do so.

Addressing delegates at a conference hosted by PK-Netz in Berne yesterday, Jordan said Switzerland’s negative interest rate – currently -0.75% – and the SNB’s willingness to intervene on the foreign exchange market were still essential in order to ease upward pressure on the Swiss franc. If unchecked, this pressure would lead to lower economic growth, lower share prices and no improvement in earnings for pension funds, he said.

Lower economic growth would also provoke higher unemployment, reducing the pension funds’ contribution base, he added.

The SNB has often been called upon to abolish the negative interest rate to relieve pressure on pension funds. 

Jordan said: “The SNB is not responsible for social policy. [But] by consistently and credibly pursuing a policy geared to price stability, the SNB is contributing significantly to a solid foundation [for the pension system].”

He also ruled out distributing some of its income to pension funds, saying this raised the issue of potential conflicts of interest with central bank’s mandate. 

Jordan applauded pension funds’ actions to improve sustainability such as increasing allocations to equities and real estate, and cutting benefits, but said that the measures were now insufficient because of rising life expectancy.

“Only a limited number of adjustment mechanisms can be used to restore the equilibrium of a pension system,” he cautioned, suggesting that either benefits could be decreased or the period of benefit payments could be shortened.

Last month a group of Swiss pension fund bodies called on politicians to urgently pass reforms to address the harm done to the Swiss pension system from sustained negative interest rates. 

Denmark, Sweden exemplars

Despite this, he held up Denmark and Sweden as examples of countries that have found workable solutions to the pension fund headache of rising life expectancy and low interest rates.

He noted that the two Nordic countries, which are now ranked several places ahead of Switzerland [in the Melbourne Mercer Global Pension Index], had implemented far-reaching and thus painful measures to stabilise and modernise their pension systems.

Jordan said: “Denmark has linked the retirement age to life expectancy, and Sweden is making the level of pension payments directly dependent on demographic and economic developments. These two examples show that it is possible, even in this politically fraught area, to find workable solutions.”

He concluded: “As pension fund managers, you have fulfilled your obligations and have taken action in the very challenging environment of the past few years.

Switzerland’s political bodies, too, recognised some time ago that the pension system must take account of the economic realities. Some initial steps have already been taken along this rocky road. But there is still a way to go.”

 

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