The year 2020 was exceptional in many aspects. The Corona crisis also challenged the legislature. New priorities had to be set and important debates had to be postponed until next year. With the BVG-reform 21, an important dossier is being dealt with. In the meantime, the draft version of the message on the BVG Reform 21 has been published, and the days between Christmas and New Year’s Day were once again a good opportunity to take a critical look at the proposal, which has been debated for some time now, with a little more distance.
To achieve a positive result, the right adjustments need to be made. It is important to identify and use «leverage effects». This way of thinking and looking for the right levers is an essential ingredient for success, in business, in research or even in leisure time sports. In politics, this seems to happen all too often only in the optimization of votes. When it comes to proposals, people stick to the status quo and keep to the old ways. Changes are associated with uncertainty, fear of loss arises.
This article starts with an overview of the planned reform, followed by the planned measures and ideas for a future-oriented 2nd pillar with more flexibility and a significantly higher benefit level. Ideas may and should stimulate thoughts. In a follow-up article, I would like to show with a progressive proposal where the big leverage effect in the 2nd pillar is and how this could lead to a significantly higher benefit level.
After failed reform projects, a solution capable of gaining majority support is needed
«Occupational pension provision is in good shape», this assessment could be derived from looking at the average funding ratio of Swiss pension funds. The funding ratio of a pension fund is a much-used indicator to put the assets of a pension fund in relation to the expected liabilities. According to Swisscanto’s Pension Fund Monitor, the average funding ratio of private-law pension funds is over 111 % as of the end of September 2020. That looks good, doesn’t it?
Experts come to a different conclusion. The 2nd pillar’s provision for saving for retirement (funded scheme) has turned into a complex redistribution construct. The comparability of the reported key figures is difficult and the assumptions about the future are based on extremely optimistic assumptions.
According to the OAK, over CHF 7 billion was redistributed in pension funds in 2019. The redistribution results from too low interest credit for active insured persons. The retirees, on the other hand, benefit from higher interest credits and thus from higher pensions. The lower interest rate leads to drastic consequences for the younger generations: At retirement, retirement benefits will be significantly lower.
Failed reform attempts show the challenges of a political solution. Proposals from the national umbrella organizations of the social partners (Travail.Suisse, Swiss Federation of Trade Unions SGB, Swiss Confederation of Skilled Crafts SGV and Swiss Employers’ Association SAV) have been incorporated into the BVG-reform 21. The draft can now be presented as a broadly supported compromise solution.
Similar to the failed reform attempts in 2010 and 2017, the new plan also includes an element that has been strongly criticized in expert circles. With the projected pension surcharge, a package has been put together. Does this package have the potential to help the bill achieve a breakthrough, or is it more likely to put the plan in danger of being rejected once again?
What are the main objectives of BVG-reform 21?
Life expectancy has been rising for many years. Due to the increased duration of pension benefits and lower investment returns, the current benefit level cannot be financed in the long term without reform. The proposal is therefore intended to secure the financing of occupational pension provision with various measures. At the same time, the benefit level is to be maintained and improved for people with lower incomes and part-time employees.
What measures are intended?
- Reduction of the minimum conversion rate from 6.8 % to 6 %.
- The coordination deduction is to be cut in half and will now be 7/16 of the maximum AHV retirement pension (CHF 12’548 instead of CHF 25’095)
- Retirement credits are proposed to be new at 9 % until age 45 and 14 % thereafter until retirement.
- An unlimited pension supplement is to be granted as a compensatory measure.
I assessed the proposed measures in the article «BVG Reform Needs Reform.» The preliminary draft of the reform had adopted the compromise proposal of the social partners. On November 25, 2020, the Federal Council approved the dispatch on the reform of the occupational pension plan (BVG 21) and referred it to parliament. In the meantime, various groups have published their own reform proposals and comments.
What is missing in the reform proposal?
The pension system should be simplified. We receive this feedback from countless customers. Hardly anyone has an overview of the various options and limits of the different pillars of the Swiss pension system anymore. The reform should be used to simplify the 2nd pillar, not least in order to increase awareness and trust in the pension system. Simplification leads to less bureaucracy and costs for employers and the administration of pension fund assets.
We would also like to see the following additional elements in the existing template:
Lowering the entry threshold (and thus completely eliminating the coordination deduction)
The current entry threshold of CHF 21,510 does not justice to new working models. People with different jobs, several part-time jobs and project workers (freelancers) will hardly be able to insure themselves in the 2nd pillar. The option of joining the supplementary institution is inconvenient and not practical. The entry threshold could be taken over from the OASI settlement obligation (from CHF 2’300) and go hand in hand with this. This would substantially simplify the accounting for all and better protect people with low incomes.
As a consequence of the lower entry threshold, the coordination deduction would have to be waived. The reduction by half of the existing coordination deduction envisaged in the draft is a step in the right direction, but only a half-hearted one. With foresight, the entry threshold should be lowered and the coordination deduction abolished. Although this will lead to additional costs on low wages, this step is unavoidable in the medium term.
Strengthening the BVG compulsory scheme, more self-determination in the supplementary scheme
Eliminating the coordination deduction would strengthen the BVG compulsory scheme. More freedom and flexibility for the area of extra-mandatory pension provision would create incentives for additional pension savings. The restructuring obligation for employers should be limited to the BVG mandatory, 1e pension plans with free choice of investment strategy should be able to be offered from the extra-mandatory. This would give many additional insured persons access to a pension plan with more self-determination.
Specific compensation measures
Depending on the form of the final draft, compensation measures must be defined in a systematic manner and implemented at the pension fund or employer level. Pension funds have built up provisions for the expected retirement losses.
Standardized contribution rate
A uniform contribution rate starting at age 18 would bring many advantages (see also «BVG reform needs reform»). It could also eliminate disadvantages in the labor market for older workers.
Free choice of pension plan for self-employed persons
Art. 44 BVG provides that self-employed persons can be insured with the pension fund of their profession or their employees. Self-employed persons in particular should be given the opportunity to join a pension fund of their choice. In order to put a stop to „à la carte“ solutions, it is necessary to work towards binding rules regarding taxation (see next section).
Equal tax treatment
Voluntary payments into the 2nd pillar can be deducted from taxable income and are therefore a popular way of increasing retirement savings while optimizing taxes. The amount of the possible contribution depends on the number of possible contribution years, any interest on the purchase table, the amount of the annual retirement credits and the amount of the insured salary.
The employer’s pension plan is crucial in determining how much can be paid into the pension plan. A job change can result in the purchase potential being significantly higher or not being available anymore. However, insured persons of the 2nd pillar should be treated equally. An employer’s pension plan should not determine how much can be paid into the pension.
Opening investment ranges
Pension funds find themselves in an area of conflict. Liabilities determine risk capacity and thus influence investment allocation. New models could significantly increase risk capacity and long-term return potential. In a separate article, we outline a progressive idea of a new model that could be used to leverage over the long term.
Conclusion: To move forward, we must be prepared to cut off old habits, otherwise we will never find our way out of the impasse. For the younger generations, it is to be wished that a pension-Greta can be found soon, which in a metaphorical sense also brings sustainability into pension provision.
Beat Bühlmann, Managing Director finpension AG