Fairness rather than redistribution in the second pillar - Part 2: What is going wrong in occupational retirement provision – and what are the reasons?

The second pillar, occupational retirement provision, was enshrined in law in 1985 (BVG) with the aim of enabling people to maintain their accustomed standard of living in old age together with the AHV. It consists of two components, the savings part and the risk part. The principle of solidarity applies in the risk part, because everyone pays in together. This idea of solidarity makes sense in the case of long-term illnesses and premature death – in these cases we are talking about intentional redistribution. With regard to the savings part, however, the funded model applies: Everyone saves for themselves to ensure a good standard of living after retirement. No redistribution is provided for by law here.

In the past 37 years, the underlying conditions have changed fundamentally and therefore – in a somewhat creeping manner – ever greater redistribution is also taking place, including within the savings share of occupational retirement provision. This means that the income from my saved capital, which actually belongs to me, is partly redistributed to others. And my capital for old age is not growing as originally intended but remains smaller than it should be. What are the causes of this redistribution?

• The population in Switzerland is aging, while at the same time significantly fewer children are being born. As a result, the ratio between those in employment and those claiming a pension is changing. According to the Federal Statistical Office, in 1991 there were 28 pensioners for every 100 people in work, but this number had already reached 35 pensioners by 2019. The Federal Office forecasts that there could be as many as 50 pensioners per 100 people in work by 2040.
• In 1985, the year in which mandatory occupational retirement provision was introduced, a 65-year-old man still had an average life expectancy of 15 more years; today it has increased to 20 years. The money saved must therefore cover a longer period of time.
• In addition, the founders of occupational retirement provision assumed that the pension assets could earn interest at an average of 5 percent over the long term. But this has not been the case for many years: Interest rates are currently so low that pension capital is growing significantly slower than originally planned.
• Both factors, the higher life expectancy and the lower interest rate, mean that the statutory conversion rate of 6.8 percent for the mandatory part is notably too high. This means that the saved capital is no longer sufficient for the longer pension period.

This all creates a funding gap for the pension funds. In order to be able to pay out the promised pensions, the pension funds have to shift, or redistribute, some of the investment income from those in work to pensioners. In addition, the pension funds are forced to reduce the conversion rate on non-mandatory retirement assets. As a result, companies with high wage levels and generous pension fund benefits co-finance other companies that have low wage levels and offer only minimum benefits to their insured.

The basic idea of the second pillar is that each insured person saves for themselves; this is what we refer to as the funded model. This principle is undermined as redistribution increases. For the insured, this means that their future retirement benefits will not be as high as they could be because they will have to share their investment income with those claiming a pension. It also means involuntary solidarity for employers with other, less efficient or committed companies. This makes them less attractive to qualified employees, because they can no longer differentiate themselves by offering a good pension. The income from my saved capital is not credited to me exclusively; part of it is redistributed to other insured persons or pensioners in the same joint foundation. If someone else were to withdraw money from my bank account, I would object immediately. In the case of occupational retirement provision, I would notice this effect at the latest after retiring, when the accumulated retirement savings are less.

Because we are all living longer, pensioners’ retirement savings capital must last longer and longer. In addition, the number of pensioners compared to those in gainful employment is also increasing. The current conversion rates are too high because they assume a shorter life expectancy and higher investment income. This creates a funding gap. In order to plug this gap, today's working population will have to forgo part of the returns on their retirement savings capital for the benefit of pensioners – this leads to unintentional redistribution.

In order to ensure that today's working people, and above all our children, can also rely on the second pillar, it must be modernized in a sustainable manner.