At the pension fund of the big bank UBS, several hundred retirees who have retired with comparatively low conversion rates in recent years will receive pension increases. Other health insurance companies deal with the topic differently, as a survey shows.
How can retirees who have started their retirement on less than favorable terms participate in the investment success of their pension fund – and should they at all?
The UBS pension fund made headlines in early May with pension increases. In order to avoid the formation of “loser generations”, a few hundred retirees who have retired with comparatively low conversion rates in recent years will receive a pension increase for life.
The conversion rate is used to calculate the amount of the pension when you retire – the retirement assets saved in the pension fund are multiplied by it. From May this year, a pensioner affected by the reduction who retired in 2019 will now receive a conversion rate of 4.6 percent instead of 4.42 percent. For a capital of 1 million francs saved in the pension fund, he now receives an annual pension of 46,000 francs instead of 44,200 francs.
Retirees who retired from 2019 were particularly hard hit by the UBS pension fund – this year the big bank’s fund reduced the conversion rate from 5.42 to 4.42 percent.
Signal effect of the pension increases?
Pension specialists assume that the decision will send out a signal to the UBS pension fund, meaning that other pension funds are likely to follow suit.
The question arises as to how pensioners could participate in the results achieved by the pension funds, says Hanspeter Konrad, director of the pension fund association Asip. In 2021, many pension funds had made high profits on the stock market and their insured high interest credits on their pension assets credited.
“Meanwhile, many pension funds have introduced so-called participation mechanisms that also include pensioners,” says Konrad. With these models, the distribution of surpluses for different insured and pensioner groups is assessed transparently. “However, in many health insurance funds there should be a catch-up potential for additional interest, primarily for the actively insured, which should be compensated for before the pension recipients are taken into account,” says Konrad. So it depends on the situation of each individual pension fund.
The ASIP welcomes the fact that the pension increases are not about “undifferentiated pension adjustments with the watering can”. It is important that these measures are always based on the current financial situation of the pension fund, says Konrad. There can therefore be no general recommendation to increase pensions. “While the topic of inflation has not really been central in recent years or even decades, it can now be expected that maintaining the purchasing power of current pensions will be discussed more broadly in the foundation boards again in the future.”
A survey of several representatives of large Swiss pension funds shows that they deal with the topic differently.
BVK has launched the “cohort model”.
The BVK pension fund already communicated such a model – under the title “cohort model” – in 2015 and has anchored it in the regulations with annual updates since January 1, 2017, says Thomas Schönbächler, CEO of BVK. According to its own statements, the pension fund is the largest in Switzerland with around 130,000 insured persons. As can be heard on the market, such “cohort models” are currently also being discussed in the foundation board of some other funds.
Schönbächler explains the model as follows: Before the pension fund tackles the equalization among the individual pensioner generations, it makes sure that the active insured have received at least the interest in advance that the year with the lowest conversion rates guaranteed. “In this way, we ensure for each retiree year that improvements in benefits are granted in such a way that active insured and pension recipients receive at least the same interest credits,” he says. As in the case of the UBS pension fund, a further distinction is made within the group of pensioners. After all, like all pension funds, BVK has pensioners who retired on different terms.
Schönbächler points out, however, that improvements in benefits for pensioners can only be properly financed if there is no redistribution from active people to pensioners. The BVK made the necessary adjustments for this.
No free funds at Publica
At the country’s leading collective institution, the federal pension fund, Publica, possible participation models for various cohorts of pensioners are not under discussion, as spokeswoman Beatrice Rychen reports. This is the case “because our pension plans currently do not have free funds that can be distributed among the insured and pension recipients”. Twelve open and seven closed pension plans are affiliated with Publica.
Collective and community institutions (SGE) have become increasingly important in occupational pensions in recent years. Collective institutions are pension institutions to which several employers are affiliated. The latter are often SMEs because they are often too small to run their own pension fund. In community facilities, on the other hand, professional associations are organized.
“As far as we know, collective and community institutions are not planning a model similar to that announced by the UBS pension fund,” says Therese Vogt from the office of Inter-Pension, the interest group for autonomous collective and community institutions. “This is because the conversion rates and consequently the old-age pensions are still very high for many of our members.”
In the past there has also been criticism of the SGE in this regard. Since they are in competition with each other for new connections, they were hesitant to lower the conversion rates. The SGE, on the other hand, argued that they often had much better age structures than many company pension funds. “Many of our members have reduced the conversion rates over a longer period of time and in moderate steps,” says Vogt.
Like Konrad, she also points out that many pension funds have pension participation models in which a 13th retirement pension is paid or other one-off additional pensions are paid if the interest paid by the active insured is higher than the interest rate implied in the conversion rate.
Migros pension fund pays 13th pension
The pensioners of the Migros pension fund (MPK) also received a 13th pension in December last year, as reported by the manager Christoph Ryter on request. This cost the MPK around 49 million Swiss francs or around 0.2 percentage points in the coverage ratio. “On the other hand, the costs of the wage increases for the active insured were no longer fully covered by contributions, but were at the expense of the degree of coverage – so we were looking for a certain balance here too, albeit with a one-off payment.”
For the period from 2023 onwards, the Board of Trustees is discussing what a Meccano would be like in order to allow active insured persons and pensioners to participate “fairly” in the free funds that are still available, he continues.
No similar plans at the CS pension fund
However, the Credit Suisse pension fund does not have any similar plans to the UBS pension fund. “We have not planned any corresponding adjustments at the moment and continue to plan prudently with a strategic focus on long-term stability and security,” says Martin Wagner, CEO of the CS pension fund. “Our conversion rate is comparatively high at around 5.3 percent and has been gradually reduced over a longer period of time so that no one age group is disproportionately affected.”
Unwanted effects for the redistribution?
Meanwhile, opinions within the industry differ about pension increases for a specific group of retirees. There are also critical statements.
Compensation for a certain group of pensioners could affect other groups of pensioners and thus steer the redistribution between active people and pensioners in an unintended direction, for example. Fairly taking into account adjustments such as reduced conversion rates, deposits or restructuring contributions in the event of selective pension increases is an extremely difficult task.
An example is the cost-of-living bonuses that many pension funds used to pay. It was often graded according to the amount of the pension paid out. Accordingly, the question now arises as to whether this gradation should be taken into account if, years or decades later, a further allowance is to be paid with a new model. It is also not clear whether the pension funds even have the necessary IT systems and data for fair compensation.
Pensions specialist Werner C. Hug is also skeptical: “If different conversion rates or subsequent pension improvements are paid between different cohorts, then that contradicts the forced savings in occupational pensions,” he says. This requires that high and low wages are managed together and that a uniform conversion rate is applied in old age.
“If payments are made over forty years and pensions are distributed over twenty years, then one cohort should not be given an advantage in the short term and another disadvantaged. It should be consistent over the years.” Complicated calculations for individual cohorts mean that occupational pensions are increasingly becoming an individual insurance with tax advantages for higher wages. This is shown by the 1e pension plans for higher earners. However, this no longer corresponds to the idea of the second pillar and in particular the obligation, which together with the AHV should guarantee at least 60 percent of the last salary up to 86,040 francs.