Paul Seewer
The conversion rate is hardly the most important, but it is the most well-known term in occupational pension schemes. Since there is another attempt to revise the 2nd pillar, we want to lose a few thoughts about this percentage.
Let’s start with a trick question: which fund is better, the one with a conversion rate of 5.5 percent or the one with 4.9 percent? The answer is: I don’t know. I don’t get the pension paid out in percent, but in francs.
Perhaps a short repetition of the percentage calculation will help: If I want to know the amount of the pension with the conversion rate, I first have to know what 100 percent is. 100 percent is the capital that has accumulated in my account over the years. If this capital is converted into a pension at a rate of 6.8 percent, there are 6800 francs for every 100,000 francs. At a rate of 6 percent, according to Adam Riese, it is only 6,000 francs, i.e. 12 percent less. If the pensions are to remain unchanged despite a reduction in the conversion rate, the capital must be increased by 13 percent.
This is done by increasing employee and employer contributions. This is exactly what the various models envisage that are now being discussed in the reform of the Federal Law on Occupational Pensions (BVG). There is a problem for the transition generation: people who are about to retire could not top up their capital with higher wage deductions in order to offset the falling conversion rate. Temporary solutions are needed for them.
For years there has been talk of lowering the conversion rate from 6.8 to 6 percent. Practically all pension institutions have long since had to adjust their conversion rate downwards because of the steadily increasing life expectancy. This is possible because only the mandatory part is affected by the BVG revision. So that part of the credit that has been saved due to the legal minimum requirements. But if a higher insured salary, higher employee and employer contributions or a lower coordination deduction than legally required are applied, this creates extra-mandatory assets.
Of the well over one trillion francs that are held by all the pension funds in the 2nd pillar, only around 40 percent are compulsory. The remaining 60 percent are extra-mandatory and not affected by the current BVG revision. The pension funds can determine the rate at which they convert the extra-mandatory assets into a pension.
How far the pensions fall is ultimately not decided by the legislature, but by the individual pension institutions. Most of them have a maneuvering mass with the extra-compulsory savings that is not affected by the lowering of the statutory minimum conversion rate.