Weak economy threatens Swiss pensions

The growing ranks of the elderly are prompting a rethink of the pension system Keystone

Pension reform is urgently needed, according to a recent study, which says insurers are ill prepared to provide for the growing ranks of the elderly.

The study, commissioned by the Swiss think-tank “Avenir Suisse”, says insurers who manage company pension schemes are likely to run short of cash in the future, and will struggle to meet their commitments.

One reason is because the bulk of the pension funds’ income – between 60 and 80 per cent – comes not from members’ contributions but from returns on investments in the capital markets.

“The performance of the capital markets is inherently uncertain,” says Jakob Schaad, project leader at Avenir Suisse. “If you look at price movements of shares, even on a horizon of 30 years, it moves quite a lot and you cannot promise [future pensioners] a full income.”

Downturn

Analysts say that, during the boom years of the late 1990s, stock market returns were more than sufficient to cover the pension funds’ responsibilities. However, they say the downturn has seriously weakened earnings and the level of future returns remains uncertain.

Schaad told swissinfo that the government should face up to the reality that the pension system, with its heavy reliance on investment returns, cannot fulfil all the requirements demanded of it.

“By law, the pension plan has to provide a certain number of pensions and a certain performance in terms of interest,” he says. “And at the same time it has to be provided without risk. These elements are not compatible.”

Adding to the risk is Switzerland’s ageing population which, says Avenir Suisse, will threaten the state’s and pension funds’ ability to provide for the growing ranks of the elderly.

Ageing population

“The Swiss pension scheme is one of the best in the world,” says a co-author of the study, Heinz Zimmermann. “However, its shortcomings will become more evident with demographic changes.”

Indeed, Zimmermann takes the view that the government should abolish the system of guaranteed state pensions altogether.

Like company pension funds, government is committed to providing every retired person with a certain minimum income once they retire.

Schaad agrees. “We are living in an ageing society, which for pension schemes means fewer people will be working to pay the pensions of the elderly.”

He added that Avenir Suisse was not predicting a complete crash of the pension system unlike the American think-tank, “CSIS”, which is talking “of a capital market crash because pension plans will start selling their assets from 2010 on”.

Solutions

Schaad believes new laws need to be put in place to increase competition among pension providers. If people were able to choose their own pension funds, rather than having to join their employers’ scheme, “that would push pension plans to improve their performance,” he says.

But he adds that such a move would have to be accompanied by a change in the law freeing funds from having to guarantee a certain level of benefits – normally around two-thirds of final income.

With competition, pension plans would be forced to be more transparent and to reveal their performance levels in order to attract customers who could select the combination of return and risk for themselves, Schaad said.

swissinfo