18 June 2021. Occupational retirement provision has been the tried and tested second pillar of retirement provision for decades. For many in Switzerland, it is by far their largest asset and an important source of their retirement income. By the time they retire, many working people will have saved several hundred thousand francs. This may sound like a lot, but given today's life expectancy at the age of 65 (as of 2019), it must be sufficient for 20 years for men and even 23 years for women.
Every franc saved is nowhere near worth what it should be
It is therefore important and reasonable to ask oneself: “What are my savings actually worth in the occupational retirement provision?” Or, to put it another way, “Are we really getting the most out of our occupational retirement provision?” A recent study by the Institute of Insurance Economics at the University of St.Gallen (HSG) looked at precisely this question and came to some clear conclusions: Our savings are nowhere near reaching their full value, but could have much more potential. Because of redistribution and conservative investment strategies, the expected retirement assets at the end of our working life are much smaller than they could be under optimal conditions.
Evaluation of 15 of the largest pension plans
Specifically, data from 15 of the largest occupational pension providers were analysed, including six comprehensive insurance providers and nine semi-autonomous foundations. Together they cover about 45 per cent of the Swiss pension market and are thus particularly relevant for SMEs. As part of the study, the researchers involved first calculated how much money had been redistributed by these pension plans from the working population to pensioners in recent years. They then looked at how the insureds' savings were invested. In both areas, the results were disturbing:
Redistribution: On average, working people lose 1 to 2 per cent of their retirement savings each year
For each working contributor, an average of 1,000 Swiss francs is redistributed from the investment income on the pension capital every year to existing pensioners. Effectively, working people lose even more money, because the 1,000 francs would have been invested for years or even decades and would have significantly increased in value by the time they retire due to compound interest. Consequently, an actively insured person currently loses between 1 and 2 per cent of their pension capital per year due to the redistribution to the generation of retirees. The HSG researchers forecast that this redistribution will be even higher in the coming years. It is already considerable and significantly reduces the performance of the pension capital. This is particularly painful given that interest rates are currently at record lows.
The real problem: the investment returns are being wasted on a massive scale
Redistribution is one problem facing the Swiss pension fund system. Another challenge is much less known, but has far greater implications: It is above all the investment strategies of Swiss pension funds that contribute to the fact that the savings of working people do not reach their full value. The legal requirements are strict and offer little scope for differentiation in terms of risk-bearing capacity and customer preferences. As a result, the pension funds have little room for manoeuvre when it comes to investing. They are often forced to choose particularly low-risk forms of investment, such as bonds. However, these currently generate only meagre returns. The guarantees associated with the currently rigid and excessively high conversion rates are also partly responsible for the fact that the pension funds cannot invest their money as profitably as they would actually like. Guarantees always come at a price! In view of the long investment horizons of up to 40 years, it would make sense to invest the funds more boldly and thus more lucratively.
Retirement assets could be doubled by investing efficiently
A sample calculation by HSG scientists shows how drastic the effects of conservative investment strategies are: In a portfolio comprising 23 per cent equities, the expected final value was twice as high as in a conservative portfolio with an equity exposure of just under 6 per cent. A deposit period of 40 years (from 25 to 65 years) was used as the basis, during which a total of 480,000 Swiss francs was paid in. The conservative investment strategy resulted in an expected value of around 640,000 Swiss francs, while the bolder investment strategy resulted in an expected value of 1.4 million Swiss francs. The higher volatility of the second portfolio was more than compensated for by the significantly higher performance. For the contributor, this means that if the pension funds did not have to invest so conservatively, the insured could expect double the retirement assets and hence twice as much pension, according to the calculations in the HSG study.
Conclusion
The HSG study shows that the public discourse is insufficient if it revolves solely around demographic issues or the level of the conversion rate. While this also affects the generation of today's working people, they will above all be disadvantaged by the effects of systematic redistribution, rigid pension models and limited investment opportunities. These lead to the savings not reaching their optimal value and a lot of potential is currently being wasted. A broad public dialogue is needed in order to finally address these grievances. We need to look for creative solutions that give pension funds more room for manoeuvre in order to exploit new opportunities and options in occupational retirement provision.
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