Sandro Meyer (Head of Life and Member of Executive Management, Zurich Switzerland), the second pillar is under pressure. What’s causing the problem? Demographic change?
For pension funds it has become increasingly difficult to generate the guaranteed interest rates for retirement pensions by means of secure investment strategies. The legally prescribed conversion rate of 6.8 percent assumes an interest rate of around 5 percent on the actuarial pension reserves. If, however, the retirement pensions are to be invested with no risk, the yield in the current investment environment is 0 percent or even negative. The consequence is a funding gap.
And that’s all at the expense of those working?
Correct. As the retired employees no longer actively pay into the scheme and their pensions cannot be cut, the funds of those working are used to fill the gap. This affects above all those who have a balance in excess of what is mandatory, who make voluntary additional payments. The Occupational Pension Supervisory Commission (OPSC) estimates the redistribution from active insured persons to retired persons at around CHF 7 billion per year.
And that is why Vita Invest is reducing the conversion rate to 3.7 percent?
I have to elaborate on that. The expected conversion rate is 5.0 percent. 3.7 percent of that is guaranteed and 1.3 percent is dependent on investment performance. But the key factor is that the conversion rate can be applied to significantly higher retirement assets, which can increase so much because no redistributions have to be made during the active period. The new conversion rate includes only life expectation, as well as partners’ and children’s pensions. The conversion rate of 3.7 percent is based on a guaranteed minimum interest rate of 0 percent. The guaranteed minimum interest rate is an assumption that at least this return will be generated each year.
But 3.7 percent is not much more.
That’s deceptive. The conversion rates tend to be overestimated. The key factors are the retirement assets that are saved up until retirement. With Vita Invest we are the first joint foundation to offer a retirement provision solution to all those who want to make more from their retirement assets and are prepared to take a certain level of risk.
We guarantee a basic pension with a guaranteed minimum interest rate of 0 percent. In doing so we gain the flexibility to be able to achieve a higher return on investment in the long term, which then benefits the pensioners.
But how do you intend to satisfy the legally prescribed pension conversion rate of 6.8 percent with a conversion rate of 3.7 percent?
The minimum benefits according to the law on occupational retirement provision (BVG) will be provided in any case. The legal conversion rate of 6.8 percent is applied in the case of the mandatory retirement assets. The BVG mandatory coverage extends up to a maximum annual salary of CHF 86,040. The salary components in excess of this – known as the super-mandatory element –, are not subject to any restrictions. The minimum benefits according to BVG will also be provided in any case with Vita Invest, but without any redistribution to other companies. To make this possible a corresponding proportion of super-mandatory retirement assets is required. But the lower guarantees also mean that higher returns can be achieved, in order to maximize the available income in retirement for every generation.
- It is becoming more and more difficult for pension funds to generate the guaranteed interest rates for retirement pensions by means of secure investment strategies.
- For that reason Vita Invest is launching a new system with a guaranteed minimum pension, as well as an additional variable element.
- Redistributions will also be excluded. Under the umbrella of the Vita Invest Joint Foundation, a separate balance sheet is prepared for each affiliated pension fund.
Who do you want to appeal to primarily with the new retirement provision model?
Vita Invest is of interest to companies with more than 20 employees. It is a niche product for medium-sized companies which are looking for a pension fund solution that stands out from the currently existing offers and which in particular excludes redistributions. In order to fill the gap in their pension promises, more and more pension funds find themselves compelled to use the funds of those still working. In the case of joint foundations, this is compounded by a redistribution between the pension funds of the affiliated employers. At Vita Invest we can largely exclude this.
How do you manage to do that?
Under the umbrella of the Vita Invest Joint Foundation, a separate balance sheet and separate annual financial statements are prepared for each affiliated pension fund. The affiliated employers act entirely autonomously and independently of other pension schemes. Redistributions, which have almost become the rule today, do not take place with us. During the active period, each insured person is assigned an individual share of the fluctuation reserves and unrestricted assets of the employer’s pension scheme, in addition to the interest on the retirement assets. The pension model is based on a guaranteed retirement pension, plus the use of the share of fluctuation reserves and unrestricted assets, as well as participation in performance.
So you are aiming primarily at people with a high super-mandatory element.
Vita Invest is of great interest for people such as these, because they are prepared to accept a certain level of risk along with a guaranteed basic pension.
What has been the response of the market to Vita Invest?
We are getting consistently positive responses from customers and brokers. But we are also noticing that the subject is not easy to understand. Which is hardly surprising. With Vita Invest we are one step ahead of the markets, so we need to do a little more explaining.
What are you aiming to achieve in the end with Vita Invest?
We want to make a contribution to the further development of occupational retirement provision. With Vita Invest we are focusing on building up capital. In the end it is the size of the retirement assets which determines the size of the pension. There is currently no other joint foundation in Switzerland that exploits the technical flexibility that you are offered in the investment strategy as consistently as we do with Vita Invest.
But you are also taking a certain risk with it.
That is precisely what marks out the Vita brand. Over 15 years ago we successfully launched the semi-autonomous Vita Joint Foundation, then we delivered the innovative Vita Classic interest model and now we have Vita Invest.
But why are there so many joint foundations under the Vita brand?
Under the Vita brand we offer a variety of occupational retirement provision solutions, which suit different companies. With them we can cover all their needs.
But in doing so are you not undermining Vita Classic, your successful product?
On the contrary. Vita Invest slots in well into the Vita family and represents an ideal addition to the offering. Vita Classic will continue to be our flagship product, because it suits the needs of many companies. That also comes out in the figures: Vita Classic includes 21,828 affiliated employers, with total assets amounting to CHF 14 billion. The equity ratio is 28 percent. In the case of Vita Invest we currently have 59 affiliated employers with assets amounting to CHF 762 million. The equity ratio varies between 24.5 and 50 percent, depending on the investment strategy.
Quadruple Vita – the retirement provision solutions from Zurich
- Vita Classic
With over 21,000 companies, this joint foundation is the biggest under the umbrella of “Vita – occupational retirement provision”. Vita Classic offers sustainable solutions in occupational retirement provision, which can be flexibly adapted to meet your specific needs.
- Vita Invest
This joint foundation is ideally suited to medium-sized and large companies which wish to have a say in shaping their occupational pension provision and the investment of the pension assets. Vita Invest is particularly suitable for those who want to accumulate a high level of retirement assets.
- Vita Select
The joint foundation offers 1e retirement provision solutions in the super-mandatory range. Employees with an annual salary of CHF 129,060 or more can choose between five different investment strategies and decide for themselves where their retirement provision assets are to be invested.
- Vita Plus
With the Vita Plus retirement provision solutions, companies define a catalog of benefits which is tailored to the needs of their employees and which they can manage separately from the BVG basic provision. The employees benefit from the guaranteed interest earned on their savings balance, as well as from interest and risk surpluses.