The pension fund of the big bank UBS is retrospectively increasing the pensions for several hundred retirees. This step means new territory, but it could have a signal effect for other funds. It’s about fairness and equal financial treatment, says Managing Director Thomas Jeney.
Subsequent pension increases: With this step, UBS is breaking new ground.
With the UBS pension fund, pensioners who retired in recent years with comparatively low conversion rates will receive a pension increase from May. According to industry representatives, several pension funds are currently examining such voluntary additional benefits for pensioners. “However, the UBS pension fund is breaking new ground with the implementation,” says Thomas Jeney, manager of the pension fund, which is one of the largest in Switzerland. There has never been a voluntary pension increase at the UBS pension fund, which has existed since 1999.
According to Jeney, a few hundred of the 16,500 pensioners in the UBS pension fund will receive a pension increase. “These are all pensioners who, as former insured persons, had to accept low interest on their retirement assets and then a comparatively low conversion rate due to redistributions that were not part of the system,” he says. “It’s about fairness, about financial equality.” Specifically, all pensioners who retired in 2020 and 2021 benefited, as well as those who retired in 2019 with the conversion rates lowered at the beginning of 2019.
Lifetime pension increases
Retirees don’t get the increases as lump sums, but as lifetime pension increases. A pensioner who was affected by the reduction in the conversion rate in 2019 will receive a conversion rate of 4.6 percent from May 2022 instead of the 4.42 percent set for his pension upon retirement. The conversion rate is used to calculate the amount of the annual pension when you retire by multiplying the rate by the accumulated retirement assets.
The pensioner from the example mentioned previously received an annual pension of CHF 44,200 for assets of CHF 1 million saved in the pension fund. With the changes, his pension will increase to CHF 46,000 from May this year.
The vast majority of retirees from the UBS pension fund retired with comparatively high conversion rates, says Jeney. “In view of the goal of financial equality across generations, they will therefore not receive a pension increase in 2022.”
Up to a third lower pension
In the past ten years, there have been drastic but necessary adjustments to the UBS pension fund, says the manager. By that he means the reduction in the conversion rate, which is reflected in lower pensions. In response to low interest rates and demographic trends, the UBS pension fund has lowered the conversion rates several times in recent years. The step in 2019, when the rate fell from 5.42 to 4.42 percent, is considered particularly far-reaching. The aim was to stop the redistribution of active insured persons to pensioners.
“With the current increases, we want to prevent generations of losers arising from these reductions,” says Jeney. In 2003, an employee who retired at the age of 62 from the UBS pension fund received a conversion rate of 6.5 percent. For UBS employees who retired in 2021 at the age of 65, this was only the 4.42 percent mentioned. “As a result, insured persons who retired from the UBS pension fund in recent years received a pension that was up to a third lower than insured persons who have been retired for many years with the same retirement assets,” says Jeney.
As a basis for this, the UBS pension fund has drawn up guidelines for voluntary additional benefits for pensioners, with which they can react quickly and flexibly to changes in the economic environment. This should help to achieve equal financial treatment for pensioners and insured persons over generations. “Such voluntary additional benefits are clearly not provided according to the watering can principle, because this would make unequal even more unequal,” says Jeney. Rather, targeted additional services, i.e. a differentiated approach, are planned. He hopes that the decision will have a certain signal effect on the industry, as it will also strengthen the credibility of the second pillar of the old-age provision system.
Strong financial position of the box office
According to the managing director, the high interest on the retirement assets of the insured with the UBS pension fund also played a role. At the beginning of this year, it made headlines that it was 9.5 percent for the past year. In those years it was 3 percent (2020) and 3.5 percent (2019). However, only the active insured benefited from this interest rate, not the pensioners. “Those who retired with low conversion rates and have now also not benefited from the interest payments were at risk of becoming a generation of losers,” says Jeney.
Above all, the increases are possible because the fund is in a very good financial position. According to Jeney, the economic cover ratio of the pension fund was a high 128.2 percent at the end of December 2021. This key figure shows how large the capital of a pension fund is compared to its obligations. A degree of coverage of 100 percent therefore means that these are completely covered.
Meanwhile, there are different types of coverage levels. In the case of the economic coverage ratio, the expected future burdens are calculated using the current market interest rates. In the case of the most commonly used technical coverage ratio, however, this is done using the technical interest rate set by the board of trustees of the pension fund. The pension increases that have been decided have only had a marginal effect on the coverage ratio, says Jeney.
Prepare for higher inflation
The pension fund has already prepared for the possible consequences of higher inflation rates. The Occupational Pensions Act BVG knows no automatic cost-of-living compensation for old-age pensions, says Jeney. Demands for one could become louder, however, if inflation in Switzerland became even more of an issue. “For the UBS pension fund, the focus is then on the pensioners who recently retired at comparatively low conversion rates,” he says. Older retirees, on the other hand, who retired at higher rates, would have been more than compensated for the inflation risks. The fund’s policy provides a basis for doing this.