Foresight: also issues between social partners
Real sea serpents, the various reform projects of the LPP and the AVS will soon find their way back to the media, in parallel with the political calendar.
Remember that for the AVS the Federal Council essentially recommends an increase in the retirement age of women to 65 years and additional financing through an increase of 0.4 points in VAT, as well as flexibility, quite relative, for those who would like to gradually exit professional activity.
On the LPP side, a reduction in the conversation rate on the compulsory part from 6.8% to 6% is planned, a reduction in the coordination deduction from CHF 25,095.- to 12,443.- and a simplification of savings contribution rates according to different age groups, the idea being to reduce high contribution rates for those over 55, who undermined their competitiveness in the labor market.
As always when it comes to pension reform, significant divisions are emerging, in particular regarding the increase in the retirement age of women. Beyond the current project which seems realistic and well balanced to us, we would like to highlight a few elements which unfortunately do not make the headlines in political debates.
Are we all controlling the impacts of demographic change?
Discussions on the impact of demographic change have focused on the –very real – imbalance that it will generate for the AVS fund. On the other hand, its effects on the labor market are underestimated. The reality today is that employability declines sharply as retirement age approaches and therefore it may seem hypocritical to raise it in such circumstances. However, this trend should be reversed within a few years with the departure of the baby boom generations, which is already observed by certain sectors of activity which suffer from a shortage of qualified labor, even in traditional sectors.
Furthermore, many “seniors” are keen to continue working as long as the conditions are adapted to their age, in terms of arduousness and in terms of hours. This phenomenon probably concerns certain social-professional groups more than others, but the experience of neighboring countries indicates that “blue-collar workers” can also extend their working life years, for their benefit as well as those of their employer.
We are therefore dealing with issues that concern all social partners and not just the political world. Therefore, it would have been desirable to place a stronger emphasis on making retirement conditions more flexible, in particular from the angle of real encouragement of employment beyond the age of 65, with a workload and contributions adapted to these new situations.
Should Foundation Boards be professionalized?
We cannot emphasize enough the importance of financial market returns for pension capital. To illustrate this, let's take the example of capital invested at 2%: after 15 years it will have increased by 35%. The same capital, invested at a return of 5%, will have doubled!
In recent years the returns paid to policyholders have been very modest, often close to the legal minimum set by the Federal Council for the compulsory part of pension capital.
One reason for this has been the need for many funds to build up solid reserves of fluctuations in value. Another reason is probably due to the conversion rates being too high compared to the reality of mortality statistics, with the consequence that active policyholders “subsidized” retirees' LPP pensions.
But a deeper reason seems to us to be the fact that the Foundation Boards are made up of a militia system dear to Switzerland: the decision-makers, represented equally by members of management and elected employees, are certainly surrounded by experts in investments, the fact remains that the management of most funds remains very classic focused on Switzerland and the best-known assets, namely bonds, real estate and stocks. The management constraint is partly regulatory, but also relates to the Council's lack of understanding of so-called “alternative” asset classes. And who says lack of understanding also means lack of comfort in daring to take more risks.
Investments that finance the real economy exist in the private debt and microfinance, infrastructure and Private Equity segments. The returns are attractive and, icing on the cake, compatibility with ESG criteria can be good.
But the liquidity of such investments is lower and this simple element is often prohibitive for a Foundation Board. Yet who other than a pension fund can have visibility into its future inflows and outflows of funds, with a time horizon exceeding a decade?
These elements, combined with the news of a coverage rate of Swiss pension funds which has increased to around 120%, mean that they could today commit more to such investments, especially at a time when the prospects long-term returns, especially for bonds, are truly modest.
Other countries already successfully practice an investment policy with high exposure to private placements. However, the decision-makers are professionals, paid for this task and who devote most of their time to it.
Are policyholders informed correctly?
From our experience, the public has little understanding of the Swiss pension system. Very few people are able to interpret their entire pension certificate, or to understand the conditions of access to a full AVS pension, itself capped even though the amount of contributions is not! And yet polls indicate that the Swiss place retirement among their primary concerns!
We can therefore be surprised by the lack of interest of this “silent majority”. This results in a lack of individual accountability for retirement financing, particularly for the second pillar where the possibilities are vast and largely encouraged by taxation. In addition, this capital often represents a substantial part of a household's assets and therefore deserves greater attention.
Employers and pension funds therefore have an important responsibility to better inform their policyholders and encourage stronger individual care.
Impact-FE helps businesses and individuals better understand and better exploit the opportunities that foresight offers. We offer several services, ranging from in-company training to an independent analysis of your pension plans, with of course always the possibility of assisting your employees to organize their assets during transition phases. Do not hesitate to contact us
