Fairness rather than redistribution in the second pillar - Part 2: What is going wrong in occupational retirement provision – and what are the reasons?

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Fairness rather than redistribution in the second pillar - Part 2: What is going wrong in occupational retirement provision – and what are the reasons?

The three-pillar system of retirement provision: AHV, BVG and personal retirement provision. In the first pillar, the AHV, the redistribution principle applies. In the case of the second pillar, the BVG, there is no provision for redistribution when it comes to saving. Nevertheless, this has crept in and is reducing contributors’ retirement savings capital. What are the reasons for this?
Fairness rather than redistribution in the second pillar
The second pillar, occupational retirement provision, was enshrined in law in 1985 (BVG) with the aim of enabling people to maintain their accustomed standard of living in old age together with the AHV. It consists of two components, the share of savings and the share of risk. The principle of solidarity applies to risk, because everyone pays in together. This idea of solidarity makes sense in the case of permanent illnesses and premature deaths – in this case, we are talking about intentional redistribution. With regard to the share of savings, however, the funded model applies: everyone saves for themselves to ensure a good standard of living after retirement. No redistribution is provided for by law: everyone bakes their own cake and then gets to enjoy it.

The causes of redistribution

In the past 35 years, the underlying conditions have changed fundamentally and therefore – in a somewhat creeping manner – ever greater redistribution is also taking place within the share of savings. This means that the income from my capital, which actually belongs to me, is partly redistributed to others. And my cake for old age is not growing as originally intended, but remains smaller than it should be. What are the causes of this redistribution?

The population in Switzerland is aging, while at the same time having significantly fewer children. As a result, the ratio between those in employment and those claiming a pension is changing. According to the Federal Statistical Office, there were 28 pensioners for every 100 people in work in 1991; this number had already reached 35 pensioners by 2019. The Federal Office forecasts that there could be as many as 50 pensioners per 100 people in work by 2040.

In 1960, a 65-year-old man still had an average life expectancy of 13 years; today it has increased to 20 years. The money saved must therefore cover a longer period of time, but the existing guarantees and conversion rates do not reflect reality. Interest rates have been so low for years that pension capital is no longer growing as originally planned. The conversion rate of 6.8% for the compulsory part set out in the law is too high. This means that the saved capital is not sufficient for the longer pension period. And due to high volatility and the persistently low interest rate environment, the returns that can still be earned on the capital markets are also increasingly uncertain. Going back to our cake example: the high conversion rate means that I receive too large a slice of the cake, which means that the cake is eaten up faster. The low yield creates a situation where the chocolate layer on my cake gets thinner and thinner.

This all creates a funding gap for the pension funds. In order to keep their unrealistic promises of payouts to pensioners – which are based on old assumptions – they have to shift, or even redistribute, some of the investment income from those in work to pensioners. In addition, the joint foundations are forced to reduce the conversion rate on non-mandatory retirement assets. As a result, companies with high wage levels and generous pension fund benefits co-finance other companies that have low wage levels and offer only minimum benefits to their insured.

The problem with redistribution is that the money does not stay where it belongs

The basic idea of the second pillar is that each insured person saves for themselves; this is what we refer to as the funded model. This principle is undermined as redistribution increases. For the insured, this means that their future retirement benefits will decrease because they will have to share their investment income with those claiming a pension. It also means involuntary solidarity for employers with other, less efficient or committed companies. This makes them less attractive to qualified employees, because they can no longer differentiate themselves by offering a good retirement provision solution. To stay with the cake example: I don't eat my homemade cake alone, as there are always others nibbling away with me. Around the coffee table with the family, I would immediately put up resistance. In occupational retirement provision, however, it's not until I'm older that I realize others have had their forks on my plate and my cake is smaller. And then it's too late.

Simply explained

Because we are all living longer, pensioners’ retirement savings capital must last longer and longer. In addition, the number of pensioners compared to active insured is also increasing. The retirement savings capital pot must therefore be sufficient for more and more people over an ever longer period of time. The current conversion rates are too high because they assume a shorter life expectancy. This creates a funding gap. In order to plug this gap, today's working population will have to forgo part of the returns on their retirement savings capital for the benefit of those claiming a pension – this leads to unintentional redistribution.

In order to ensure that today's working people, and above all our children, can also rely on the second pillar, it must be modernized in a sustainable manner.

Fair play in occupational retirement provision

Vita is committed to fair play in occupational retirement provision and provides transparent information on redistribution. Vita also creates future-proof pension products and supports you in choosing the right pension solution for yourself.

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