PK-Netz, the Swiss association representing employees in the second-pillar pension system, is warning of a so-called ‘lost generation’, a cohort of retirees that in the future will receive lower pensions because of changes in conversion rates used to calculate pensions pay-outs.
The association is therefore recommending the board of trustees of Pensionskassen to assess the possibility of increasing pensions for the ‘lost generation’.
The average interest on retirement assets increased last year to 3.69%, after years of drastic conversion rate reductions and low interest rates on pension assets, it said, adding that this was signalling that most pension funds might be well-positioned to withstand a phase of high inflation and shift in interest rate policies of central banks, despite current volatility.
The new interest rate environment is likely to stabilise the second pillar pension system in the longer term and strengthen the financial situation of Pensionskassen, the association added.
Pensionskassen might be able to provide, in the future, pension benefits for retirees without facing high risks, and the board of trustees will face the question of how to improve benefits.
The yield on 10-year Swiss bonds has risen significantly in recent months and the Swiss National Bank has tightened its monetary policy further raising rates by 0.75 percentage points to 0.5% in September.
Inflation, rising interest rates, but also losses on all assets classes this year, and the consequent reduction of the conversion rate are, however, still raising questions on the stability of occupational pensions.
PK-Netz is also urging Pensionskassen to avoid paying one-off pension bonuses, but instead to use the funds to increase the level of pensions in the long term.
It is also recommending Pensionskassen to check on their interest rate policies based on the key questions of a fair interest on pension assets, focus on the long-term and performance targets, and to review their investment strategies, taking into account the new interest rate environment as part of their asset and liability management (ALM) process.
In occupational pension schemes, pensions are adjusted to inflation based on the funds available, and the board of trustees decides on whether and to what extent pensions will be adjusted to inflation.
According to the association, the boards of trustees should actively discuss and examine in detail the topic of inflation, designing different possible scenarios.
In contrast to the pension increase for certain cohorts, Pensionskassen should grant inflation adjustments to everyone, since the loss of purchasing power affects all pensioners, and should consider the possibility of building a fund with employer contributions to fend off inflation.
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