On 22 September 2024, Swiss voters will decide whether or not to accept the latest round of government reforms to employee based pensions known as the second pillar pensions. Swiss trade unions are against the reform, which reduces the annuity rate from 6.8% to 6.0%. Instead they are calling for a higher rate to compensate for recent inflation.
Switzerland’s pension system faces a similar demographic challenge to many developed nations. Its population is ageing and people are living longer. This means fewer people putting money in and more taking money out and for longer.
This is a problem particularly for the state pension component of Swiss pensions because it is a pay-as-you-go system where money is passed more directly from workers to retirees. Employee pensions (2nd pillar) are less affected because they lean more heavily on investment with pension payments remaining more closely linked to employee contributions and investment returns. However, financial head winds exist here too.
The primary challenge for employee pension schemes is increasing life expectancy. Since 1985, when Switzerland’s employee pension system was launched, Swiss life expectancy has risen by 7 years from 77 to 84. This has extended the average number of pension years from 12 to 19, a 58% increase. In addition, interest rates are far below the averages in the 80s (and 90s) when the system was set up. In 1985 the central bank rate was 4%. Now it is 1.25%. This impacts investment returns.
In the face of these challenges the government has agreed to changes that increase contributions made by employees and employers, and lower the annuity rate (the percentage of capital paid annually until death) from 6.8% to 6.0%. Some don’t like this and have launched a referendum against it.
Against this backdrop, Swiss trade unions argued this week that Switzerland’s employee pension schemes are “swimming in money”, reported SRF. They say there is no need to increase contributions or reduce the annuity rate. Instead they would like to see a higher annuity rate to compensate for recent inflation. Unions claim the government reform ignores the current financial state of the pension funds.
Objectively, Switzerland’s second pillar pension funds are not in great shape, according to a recent risk assessment. Average assets exceeded liabilities by 10.3% at the end of 2023. But this average hides much. 17% of funds had liabilities exceeding assets. And the assets of employee pension schemes benefiting from state guarantees covered only 84% of liabilities. According to a commission of experts, 60% of funds without government guarantees have a fairly high global risk level. And while the funds guaranteed by the state are less at risk, they ultimately represent a financial risk to taxpayers who will likely be called on to fund their shortfalls.
Earlier this year, Unions supported a initiative to increase state pension payments, which was accepted by voters in March 2024. Those in favour of the plan argued there was plenty of money in the state pension fund to pay for the increase. Now it is clear there wasn’t and the increased cost will be covered by some combination of higher payroll taxes and VAT.
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