It would actually be quite simple

Recently, my children* wanted to know where I’ve been working recently. Then they wanted to know what the occupational pension scheme was. I explained the occupational pension scheme to them as follows: “Look, it’s very simple: when I work, I get paid. I put some of that money aside.” My children frowned. I continued: “I do that for my old age. Maybe one day I’ll be so old that I can no longer work. Then I’ll be glad I’ve made provisions. I’ll take the money I’ve put aside and can live on it.” The message has got through. Making provisions is easy. You save for old age.

* The eldest of our four children starts school after the summer holidays.

Why on earth has occupational pension provision become so complicated?

Unfortunately, in reality it is no longer that simple. The reason: the Swiss occupational pension scheme suffers from design flaws. You can compare it to a house that stands on a poor foundation. And although we all know that it is built on a poor foundation, we tinker with it, add a balcony, repair the cracks in the walls and make sure that it no longer rains through the roof. In business terms, we should have demolished the house long ago and built a new one on better foundations.

But it’s not that easy. You first have to make demolition palatable to the tenants. They are reluctant to leave the dilapidated building because they have lived there for a long time and rents have risen everywhere else. It’s the same with pensions: insured persons who have been paying into their pension fund for a long time don’t want a new pension fund because they would have to accept cutbacks. As times have also changed in pension provision (keyword: longer life expectancy), nobody can guarantee such high pensions any more. All that remains is to painstakingly reorganise the old BVG building.

The social partners’ proposals bring redistribution to light

On behalf of the Federal Council, Travail.Suisse, the Swiss Federation of Trade Unions, the Swiss Employers’ Association and the Swiss Confederation of Skilled Crafts have been discussing how the BVG building could be reorganised. On 2 July 2019, they presented their proposals to the public, which the Swiss Trade Association does not support. The minimum conversion rate is to fall from 6.8 to 6 per cent. In return, they want to introduce a new levy on salaries. This new levy is to benefit newly retired employees directly in order to cushion the impact of lower pensions.

Now I was faced with the problem of explaining this to my children. I could have visualised it as follows: “Every month, an older man or woman comes round and takes some of the money I wanted to put aside for my old age.” My children certainly wouldn’t have understood that. So I left it at that and preserved the utopia of a functioning occupational pension scheme for them.

Nevertheless, the social partners’ proposal has at least one advantage – we have become modest in view of the inability to reform the second pillar. The unspeakable system of redistribution, which until now has been completely shrouded in darkness, is now coming to light. Those who work have to pay. Pensioners benefit. It is to be hoped that this step will increase young people’s awareness of the machinations in the occupational pension scheme, especially as they will receive nothing from it when they themselves retire.

The example of Liechtenstein shows how it works

In 1982, the Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans (BVG) came into force. The Federal Council was tasked with ensuring that minimum benefits did not exceed income. Among other things, it was delegated the authority to set the minimum conversion rate. The possibility of lowering the minimum conversion rate if necessary is essential to ensure that the BVG does not become unstable.

This authority was taken away from the Federal Council with the 1st BVG revision in 2004. Since then, parliament has not only determined the retirement age, but also the minimum conversion rate. It does have the power to adjust pensions to higher life expectancy. However, unlike the Federal Council’s ordinances, its decisions are subject to an optional referendum. Since then, occupational pension provision has been a political plaything.

The Principality of Liechtenstein shows that there is another way. There, a statutory minimum conversion rate has not been set at all. The reason given in the brochure published by the Liechtenstein Financial Market Authority is that the calculation of retirement pensions should not be politically motivated. The need to be able to adjust benefits to current economic and demographic conditions has been recognised. For once, I would be happy if I lived in the Principality of Liechtenstein. I wouldn’t have to tell my children fairy tales about occupational pensions. It would be the truth.

When the state fails, personal initiative is required

Once you have recognised the plight of occupational pension provision, there is only one thing to do: act independently and make the most of your options. Be it in the extra-mandatory scheme as part of a 1e solution, in the investment of vested benefits or in the third pillar. If you make intelligent provisions here, look at the costs and choose the right partner, you can create added value thanks to your own initiative, which makes state mismanagement more bearable.

Philipp Zumbühl