What are the challenges facing the Swiss pension system in 2024?

The year 2024 represents a year of high stakes for the Swiss pension system. On 3 March 2024, you will be voting on two related initiatives : "Better living in retirement" and "For a safe and sustainable old-age pension scheme". You will also have to go to the polls to vote on the proposed "reform of occupational pension provision". Here's what's at stake.

The "better living in retirement" initiative

The "Better Living in Retirement" initiative tabled by the Swiss Union of Trade Unions calls for all pensioners to be entitled to a 13th AHV pension. Based on the 2024 figures, the maximum annual old-age pension would rise by CHF 2,450.00 for a single person to CHF 31,850.00 and by CHF 3,675.00 for married couples to CHF 47,775.00. Although the initiative does not deal with "how" to finance this additional benefit, the OFAS estimates that when it comes into force, it will cost CHF 4.1 billion, of which the Confederation will contribute around CHF 800 million. The AHV deficit would increase even without the introduction of this additional benefit. A deficit in the AHV scheme can be expected after 2030. If the initiative is accepted, sources of funding will have to be found, either through an increase in VAT, an additional levy on salaries, or a combination of the two.

The initiative "for a safe and sustainable old-age pension scheme"

The Young Liberal-Radical initiative "for a safe and sustainable old-age pension scheme" calls firstly for the funding of the AHV to be guaranteed in the long term by gradually raising the retirement age for men and women to 66. Secondly, the initiators want the retirement age to be adjusted in line with life expectancy. This reform would provide long-term relief for the AHV and bring the retirement age closer to that of Switzerland's neighbors : Germany 67, Italy 67, Belgium 65, with a gradual increase to 66 in 2025 and 67 by 2030 (source : Missoc / July 2022).

Reform of occupational pension provision (BVG 2021)

In March 2023, in order to secure long-term funding for the 2th pillar and improve cover for part-time workers and those on low incomes, Parliament adopted the reform of the occupational pension scheme (BVG). Following the success of a referendum, you will also have to vote on this reform in 2024. The date of the vote has not yet been decided. In accordance with Art. 10 para. 1bis of the Federal Act on Political Rights (LDP), the Federal Council will determine the issues to be put to the vote at least four months before the date of the vote.

What are the main measures?

Lowering the conversion rate

The minimum conversion rate in the compulsory LPP will be lowered from 6.8% to 6%. This means that for retirement capital of CHF 100,000.00, you will only receive a pension of CHF 6,000.00, compared with CHF 6,800.00 before the reform. To guarantee this rate in the long term, you need a constant life expectancy and a return on invested capital of at least 5% throughout the period of pension payments. This rate is not sustainable in the long term, given that life expectancy is constantly increasing and that returns on the financial markets are on average lower than the 5% target.

This reduction will make it possible to take account of the rise in life expectancy and the difficulties linked to the financial markets, while at the same time redistributing the income from the pension fund assets of working people to finance retirement benefits between working people and pensioners.

The pension funds have not waited for the electorate to vote on a reform project to adapt to demographic change and to counter the problems of the financial markets. The current average conversion rate (average of the mandatory and supplementary LPP rates) applied by pension funds is around 5.3%. Pension funds are moving ever further away from the 6.8% rate stipulated in the Federal Law on Occupational Pensions.

Maintaining pension levels

To maintain the same level of benefits with a reduced conversion rate, several measures are planned to increase savings :

• Reduce the occupational pension entry threshold to CHF 19,845.00 (currently CHF 21,510.00)
• Change from a fixed coordination deduction of CHF 25,725.00 (part of salary not covered by compulsory BVG/LPP/used to determine insured salary) to a proportional deduction of 20% of AVS/AHV salary, which will provide better cover for low salaries.
• Simplify old-age savings bonuses: currently they are divided into four categories: 25-34 years 7% / 35-44 years 10% / 45-54 years 15% / 55-65 years 18%. The reform now provides for only two age groups: 25-44 9% and 45-65 14%.

Compensatory measures for the transitional generation

The measures to boost savings will only have an impact in the long term. For insured persons who retire shortly after the reform comes into force (insured persons aged between 50 and 65 at the time of entry into force), these measures will not compensate for the reduction in retirement benefits due to the lower conversion rate. These members of the transition generation will receive a pension supplement of CHF 2,400.00 per year (if they retire at the normal retirement age) for those who retire 5 years after the reform comes into force, CHF 1,800.00 for the next 5 cohorts and CHF 1,200.00 for the last 5 cohorts. The pension assets will also be taken into account. If the pension assets are less than CHF 220,500.00, the supplement will be paid in full. If the assets exceed CHF 441,000.00, no supplement will be paid. For assets between these two amounts, a partial supplement will be paid to insured persons.

How will pension supplements be funded ?

Part of the funding will be provided by subsidies from the Guarantee Fund through an increase in the annual contributions collected from the pension funds, and the remainder will have to be met by the pension funds, probably through an additional joint contribution on salaries.

Conclusion

Our three-pillar pension system needs to be brought into line with demographic trends and the underperformance of the financial markets. The three issues put to the vote have the merit of moving the debate forward with a view to reforming Switzerland's pension system in the long term. In our view, the chances of acceptance by the population are slim. The initiative calling for the granting of a 13th AHV pension would undermine the financing of the AHV system. An initial increase in the retirement age to 66 is premature, as the adjustment of the retirement age for women to 65 has just been accepted. Although the proposed reform of occupational pension provision includes measures to maintain the same level of benefits, it is unlikely to find favor with the public, since some of the compensatory measures will benefit only some of Switzerland's future pensioners, while the entire working population will contribute to its funding.

Our pension specialists will be happy to provide you with further information. We look forward to hearing from you !

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