Swiss regulator pushes for conversion rate in view of COVID-19 crisis

first_imgThe Swiss federal pensions regulator Oberaufsichtskommission (OAK BV) is pressing for an accelerated process of adjusting pension funds’ technical parameters based on economic and demographic scenarios in light of the COVID-19 crisis.Manfred Hüsler, the director of the supervisory body, told IPE that one particular parameter to change is the Umwandlungssatz (UWS), the conversion rate used to calculate pension payouts from accrued assets upon retirement, for the mandatory part of the occupational pension plan.“The last adjustment was made 15 years ago, since then life expectancy has risen and interest rates have dropped significantly,” he said.The parliament tried twice to review the conversion rate, in 2010 and 2017, but a referendum rejected the proposal, he added. In the regulator’s latest annual report on pension funds’ financial positions, OAK BV disclosed results of a survey of 1,504 funds, which represent 92.6% of all Swiss second pillar pension funds, with assets totalling CHF1trn (€995bn).The report noted that 59% of the funds with 67% of the retirement savings had already lowered their conversion rates to 6% or lower, in fact anticipating the proposal for a reform to the Swiss second pillar pension system which expected a reduction to 6%.The Umwandlungssatz still represents a dominant risk for the second pillar system, OAK said.The coronavirus crisis has forced an extension on the reform consultation until May 29, after the Federal Council had invited the Swiss Employers’ Association (SAV), the Swiss Trade Union Federation (SGB) and Travail.Suisse to make a series of proposals for a review.“There is a clear majority in the parliament that supports reducing the conversion rate, but it is difficult to assess what the parliament’s decision will look like and whether the reform will pass, especially whether there will be a referendum,” Hüsler said, adding that a public vote can be expected on such an important matter.A reduction of the conversion rate will have an impact on the compulsory part of occupational pensions, lowering in particular the pensions of low-income workers, therefore, “there should be a compensation for these people. How this can be financed or how high it should be is very controversial,” he added.In its annual report, the authority found that the guaranteed interest rate for pensions further reduced last year, but interest rates fell deeper. Interest rates are, in many cases, higher than the technical interest rates used by pension funds to determine their funding level.This difference is not designed by law and has not yet been financed through equal contributions, it added.Returns and funding levelsPension funds have achieved above-average returns in equity, real estate and bonds in recent years. The funding level at the end of 2019 was consistently good despite low interest rates, with 99% of private and public pension schemes without guarantees achieving funding levels of at least 100%, compared to 86% in the prior year.The coverage ratio of funds without guarantees rose on average to 111.6% last year compared to 106.4% the previous year, and in the case of public pension funds with guarantees to 79.8% in 2019 from 77.7% in the year before. Manfred Hüsler, director at OAK BVAt the end of April, funding levels reached 105.6% for pension funds without guarantees, and 75.5% for public pension funds with guarantees, while 7% of the funds without guarantees showed a rather high or a high risk in terms of funding levels.The coverage situation for pension schemes with a state guarantee continues to lead to significantly higher risks, according to the report.“Pension plans with a state guarantee are exposed to the development of the capital market in roughly the same way (of those without guarantees), but you have employers under public law,” Hüsler said.The recession caused by COVID-19 crisis will not impact upon state pension plans, employers in the public sector will not lose jobs because of insolvencies, which means that companies will not lose contributions, he added.Last year, the average net return on assets generated by pension funds without guarantees was 10.4% compared to -2.8% in 2018, and 11.5% for public pension funds with state guarantee, compared to -2.6% the previous year.OAK warned that losses on all major investment classes can materialize in 2020, in addition to an increase in underfunding levels, which has already ballooned to 25.4% in the first four months of 2020 compared to 1.1% at the end of 2019.The volatility of stock markets caused by the COVID-19 pandemic has put pension funds under stress, teh report stated, adding that schemes will have to be able to critically assess whether underfunding is only a cause of market turmoil or of structural financing problems.The latter must be addressed as quickly as possible, OAK said in the report.For the regulator, pensions funds that would be able to mitigate the negative economic effects of the coronavirus crisis would reinforce financial stability based on already good funding levels prior to the crisis.Looking for IPE’s latest magazine? 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