Swiss experts warn against linking second-pillar pensions to first

SWITZERLAND – Think tank Avenir Suisse has warned against linking the conversion rate for Swiss pension funds with the first-pillar AHV fund or the so-called “safety” fund. 

The conversion rate used to calculate pension payouts from accrued assets has been a topic of heated debate in Switzerland for decades – and particularly since 2010, when voters rejected a further cut in the legal minimum rate.

Most experts accept that the conversion rate, which will be lowered to 6.8% from 2014, is still too high, but opinions differ widely on how best to tackle the problem.

Some have recommended a centralised solution generally lowering the conversion rate and compensating people close to retirement with assets from the first-pillar fund AHV or from the pension security fund into which all Pensionskassen pay contributions, the Sicherheitsfonds.

One MP recently recommended linking the Swiss second pillar to the first by paying out old-age pensions from the Sicherheitsfonds.

According to Avenir Suisse, however, any link between the second and first pillars would “endanger risk diversification in the three-pillar concept” and create “false incentives”.

The think tank called for a more “decentralised” solution, possibly even allowing pension funds and their trustees to set their own conversion rates.

As a working example, they cited neighbouring Liechtenstein, which introduced a mandatory second pillar in 1987, only five years after Switzerland.

While many aspects are similar, Liechtenstein law lacks a minimum conversion rate – instead, each Pensionskasse can set its own rate.

Avenir Suisse said: “This has not led to a race to the bottom – i.e. the attempt to generate high profits with low conversion rates.”

Instead, “market adjusted and attractive pensions are important recruiting arguments for companies with autonomous pension funds, which they do not want to lose”, they said.

They added that multi-employer schemes had to offer “attractive benefit schemes” to remain competitive.

Avenir Suisse also noted that transferring the right to set the conversion rate to trustees would increase their “sense of responsibility”.

“In the end,” they said, “we need more flexibility in occupational pensions.”