The consequences of financial difficulties in occupational retirement provision
As the most important element of retirement provision, occupational retirement provision has for a long time faced major challenges. This is because promised pensions can no longer be funded from the retirement savings capital accumulated by individuals who are now retired. There are three reasons for this:
- First, people now grow considerably older than in the years when occupational retirement provision came about.
- Second, there have been extremely low interest rates for more than ten years, meaning that returns are much lower. As a result, interest, as the "third contribution provider" alongside employees and employers, is no longer fit for purpose.
- Third, rigid legal requirements are leading to excessive guarantees – in the form of conversion rates that are too high and unrealistic interest rate pledges. Pension funds are forced to fund these through a considerable portion of the working population's investment income, which is redistributed in favor of retired persons.
BVG in difficulties – yet the population remains calm. Why?
1. Your pension fund balance forms part of your assets - but many people are unaware of this
The majority of the working population do not know that their pension fund balance belongs to them: Only 44% of the Swiss population count their pension fund balance toward their own assets. This means that the majority are unaware of this fact. Why is this? One reason could be that pension fund contributions are deducted directly from a person's salary and are not declared as assets on tax returns. It is probably for this reason that many are unaware that the money continues to belong to them. Another factor is that only one in six people surveyed knew exactly how high their own pension fund balance was at present or would be in the future.
"Only 44% know that their pension fund balance counts as part of their own assets."
2. The conversion rate is incorrectly understood
Most of those surveyed perceive a possible drop in the conversion rate as the greatest risk for their future pensions. In fact, it is the exact opposite: Because the conversion rate has not yet been lowered, a significant portion of the investment income of the working population currently has to be redistributed to retired persons.
3. Retirement provision is not a major topic
Young adults (between the ages of 18 and 25) in particular rarely consider the issue of personal retirement provision. Less than one in three (29%) thinks about this. But more than half of young adults are worried about their income in old age. The combination of a lack of knowledge and a sense of uneasiness cripples them: They sense that something is going wrong but understand too little to demand concrete changes.
"Only 29% of young adults consider their retirement provision. The remainder ignore the topic."
4. Redistribution is not recognized as a problem
Almost half of those surveyed (48%) think that redistribution in the second pillar is fair – as they are not aware that the system is conceived differently and the money actually belongs to them. If this fact were known, greater political pressure would arise – this is the belief of four out of five people (78%). These figures show how important it is to explain how occupational retirement provision works and to contextualize current developments. Yet only those who understand correlations can form a sound opinion.
5. Retain or change?
According to the Sotomo study, the guaranteed pensions in the present BVG are the main reason for the positive assessment of redistribution: Many of those surveyed hope that they too will subsequently benefit from redistribution thanks to fixed pensions. But this hope may prove deceptive. After all, the ratio of working people to retired people will continue to worsen in coming years. The pyramid with many contribution payers below and a few retired people above is showing a trend for developing into a rectangle. There is thus a huge risk that the pyramid system will reach its limits. The current working population would then be penalized twice over: Almost half of their own income on their pension fund balance is currently being redistributed. However they themselves will not benefit from this redistribution in future to the same extent – if at all.
6. Pensions with a variable portion as an opportunity
Over one in three people surveyed would choose a pension with a variable portion and lower guarantees. Young adults in particular could benefit significantly from this. Due to lower redistribution, they would receive more returns and could simultaneously exploit the compound interest effect optimally thanks to the long term. However, the greatest interest in this is shown by 46- to 55-year-olds – probably because it is this group who have already given greater thought to the correlations of occupational retirement provision.
Pensions are currently fixed and their amount is fully guaranteed. However this is expensive and reduces the potential for returns. A combination of fixed and variable portions could provide an opportunity for occupational retirement provision in the future.
"One in every three working people would like a pension with variable portions."
Conclusion: Greater knowledge for a positive future
The future of occupational retirement provision is an important topic. Vita is continuing to focus on it: An analysis will soon appear from the University of St.Gallen on the topic "Was ist ein Sparfranken wert?" (What is the value of one saved franc?). Stay tuned.
Frequently asked questions
Why, with a guaranteed pension, am I highly likely to receive less money than with a variable model?
For guaranteed pensions, the pension fund has to invest a large portion of the pension fund balance in a low-risk manner, e.g. in bonds. In the current period of low interest rates, only low or even negative returns can be generated on this capital. So high guarantees reduce the returns on the pension fund balance, and retirement assets increase less strongly.
Even in the event of the same retirement assets at the time of retirement, the variable pension model has greater power and generates significantly higher pension payments on average. After all, retirement assets remain invested even after a pension is drawn and can be invested in a more balanced manner.
What is so bad about redistribution – I will benefit from this later too?
Unfortunately, this is unlikely. Conversion rates will need to fall and are going to. The current working population will be penalized twice over: They are currently losing money thanks to redistribution, but they are unlikely to get this back in future and will also receive a smaller pension thanks to the lower conversion rate.
Do retired people now need to fear that their pensions will be reduced?
No, as current pensions cannot be altered. So people who have now retired can rely on their pension continuing to be paid.
Why is a high conversion rate bad – it means I get more money, doesn't it?
No, the conversion rate is a percentage that is used to calculate the amount of the pension. Using the comparison of a cake, the conversion rate defines the number of slices of cake, as well as the size of a slice. What is relevant is how much money can be "converted." A high conversion rate is of no use if there is little to convert. At the same time, high conversion rates have to be financed. If there is too little cake available for retired people, this must be redistributed from the investment income of the working population. Current workers are then penalized twice over: They have less money now and in the future, and conversion rates will undoubtedly be lowered subsequently.