360°Benefits I Studies
Dear readers,
While there has been some movement in the political sector in relation to pension reform, with the soon to be implemented AHV21, the outcome of the BVG reform remains to be seen. However, the future will not wait, and pension foundations must adapt to meet increasing challenges. Therefore, it is critical to reconsider existing solutions and be open to exploring new paths forward.
As the Swiss population continues to age, pension benefits are becoming an increasingly important topic for both individuals and the foundations that provide these benefits. For them and the company sponsors to regularly benchmark their benefits against industry standards and best practices is key to stay competitive.
In the current edition of the SLI benchmarking study by WTW, we look at the wider Swiss market trends and issues facing Swiss pension foundations. One of the key issues that pension plans must contend with is inflation, which has recently become a topic around the world again, even in Switzerland, after decades of low inflation. Inflation erodes the purchasing power of a pension benefit over time, which can be particularly problematic for retirees who rely on those benefits for their day-to-day expenses. Pension plans need to factor in inflation when determining the level of benefits they provide. While most Swiss plans in this study have not implemented a specific inflation-adjustment to existing retiree benefits, this is a topic being considered and we expect that the coming years will be important for pension funds and the industry as a whole for determining mechanisms for adjusting pensions for future cost of living increases.
We have seen in the last study that conversion rates for future retirees stabilised a little between the last 2 studies. While in this study, we see the median conversion rate has dropped by about 20 basis points, the low end of the conversion rate range has not fallen any further. However, with bond yields having increased drastically during 2022, it now begs the question whether pension foundations will consider increasing their technical rates and thus potentially even the conversion rates in the future.
Investment strategies are also a crucial element of pension plan design. Pension plans typically invest a significant portion of their assets in stocks and other financial instruments to generate returns that can fund benefit payments. However, investment returns can be volatile and difficult to predict, which means that plans need to carefully manage their investment portfolios. As the study observes, the last 5 years have been particularly volatile with two extremely positive years and then 2022 providing a significant drop in plan assets. However, despite the negative returns in 2022, many pension funds were able to grant significantly more interest to their active members than the BVG minimum rate of 1 %. Additionally, new ESG reporting recommendations are being considered widely in the SLI pension foundations, with over 60 % already having a formal reporting in their annual reports, at a minimum.
A further observation this year was that almost 25 percent of the included SLI peer group have increased the regular total savings contributions paid by both the employee and employer. These were typically in response to a decrease in the conversion rate and often offset partially by a decrease in the risk contributions. While we have seen this in previous studies as a way to at least partially compensate decreasing conversion rates, we have noticed such increases in savings occurring also as an offset to decreasing risk benefit costs (without conversion rate changes). This means total employer and employee contributions are unchanged but the portion allocated to savings contributions is increased. The question remains about what happens if risk benefit costs increase again: will savings contributions reduce again?
Restricting pension choice at retirement age or the implementation of 1e plans has stagnated somewhat in this study, with the foundations keen to reduce their risk having already implemented these options. With potentially more pressure put on pension foundations to increase pensions with inflation, it remains to be seen if this stagnation is temporary.
We continue to be happy to see that all the companies in this study provide benefits that surpass the BVG minimum benefits, in both risk and retirement benefits, as well as interest credits. It is clear that the companies in this study prioritize providing their employees with a strong occupational pension plan. Nevertheless, we observe significant variation in benefits among those studied, with some plans providing nearly double their peers. This can lead to uncertainty and misunderstanding by employees when looking at different companies and comparing their total compensation package.
Our study begins by examining recent trends from the employee’s perspective, followed by an exploration of topics relevant to pension funds. We have also included new analyses on the impact of part-time employment, ESG investing, and inflation, and I am delighted to share these findings with you.
Happy reading!
Stephan Wildner
Head of Switzerland
