Calculate pension reduction due to redistribution@Model.TitleTagString>
Swiss pension funds are experiencing a massive redistribution of pension assets: Thanks to record-low interest rates and increased life expectancy, guaranteed pensions are systematically costing more than is effectively being financed. The resulting gap has to be closed by active contributors, i.e. all those people who have not yet retired. According to estimates, this involves some 4 billion francs being redistributed from active contributors to pensioners – each year!
But what does this absurdly high figure mean for an individual person? How much pension money is lost each year through this process? And more importantly, how high will this amount rise if no steps are taken against redistribution in future? Answers to these and other questions are provided by the Comparis redistribution calculator – a first for Switzerland. Use this calculator to gain an idea of how pension fund redistribution affects you personally.
What is redistribution, anyway?
In a pension system, redistribution occurs when someone is paid out a higher or lower pension than he has financed through contributions made during his years of active employment and the resulting yields. For instance, the pillar 1 pension (AHV) functions using a general pot which simultaneously receives contributions from current workers and pays out benefits to pensioners. There is no individual entitlement to the contributions paid in. Redistribution also takes place in pillar 2. For instance, while all insured persons pay a premium for death and disability, only those affected by these events will actually receive any benefits (solidarity principle). Redistribution also occurs in old age. Married persons, for example, are entitled to a survivors’ pension, while unmarried persons with roughly the same pension do not enjoy this right.
Why is redistribution a problem?
Overall, retirement benefits should be financed in such a way that this redistribution process can be halted, at least in the medium term. However, because of rising life expectancy, lower investment returns, and the fact that performance parameters are not adjusted, this does not happen in many pension funds. In other words, old-age pensions are costing systematically more than what is being financed through contributions and yields. The resulting gap is closed by applying lower interest rates to the retirement savings of active contributors (those who have not yet retired). This type of redistribution is not in keeping with the principles of the pension system and this is demonstrated by the Comparis redistribution calculator.
How can redistribution be measured?
For the measurement to be correct, the redistribution amounts should be calculated individually for each pension fund, recorded centrally and then added together. Currently, however, this is not the case. Therefore, the Comparis redistribution calculator uses an estimate: When insured people retire, their retirement savings are converted to a pension. For this, a so-called conversion rate is needed, which incorporates an implicit interest rate guarantee for the new pensioner. At the same time, the new obligation to the pensioner must be valued, which also requires an interest rate (known as the technical interest rate). So in a pension fund without redistribution, the implicitly guaranteed interest rate, the technical interest rate and the interest rate applied to the active contributors’ retirement savings each year should (at least in the medium term) be the same. This is the only way to ensure that all participants benefit from the returns achieved on the assets to the same extent. In many cases, however, the implicit interest rate guarantee and/or the technical interest rate is significantly higher than the interest rate on the retirement savings of the active contributors. This difference can be calculated and used to measure the resulting redistribution approximately.
How does this affect me?
According to the Supervisory Commission for Occupational Pensions (OAK BV), Swiss pension funds valued their pensioner guarantees using a technical interest rate averaging 2.43% in 2016. The implicitly guaranteed interest rate varies from fund to fund and so is not available. However, it could be much higher – a conversion rate of 6.8%, for example, requires an interest rate of around 4.5%. Accordingly, the Comparis redistribution calculator makes the conservative assumption that this interest rate of 2.43% is equal to the implicit interest rate guarantee. At the same time, the interest rate on the retirement savings of active contributors averaged 1.54%. For active contributors and pensioners to be treated equally (i.e. no distribution), the retirement savings should therefore have an interest rate around 0.89 percentage points higher. With retirement savings currently standing at some 435 billion francs, this represents a redistribution of 3,876 million francs each year. This figure underlies the Comparis redistribution calculator but can be replaced by a different assumption on an individual basis.