InterviewNZZ Interview, 4 April 2019

NZZ Interview, 4 April 2019

The Pension Fund of Credit Suisse is responding to the difficult situation in Switzerland's second pillar system. Manager Martin Wagner was interviewed by Michael Ferber, Neue Zürcher Zeitung, 4 April 2019.

In 2018, many Swiss pension funds booked significant losses on their invested assets. Pension funds have enjoyed a good start to the new year, however. So is everything looking rosy again now?
I wouldn't say that everything is looking rosy. But I would also caution against short-term views. The pension fund business is geared around the long term. When you look at things over a ten-year horizon, the kind of fourth quarter we experienced last year may be unpleasant, but it's hardly the end of the world. When you have an investment horizon of more than ten years, the risk of losing money with equities is low.

Monetary policy remains expansionary. Should we expect a continuation of the very low interest rate environment in the coming years?
When one looks at Europe – and I am including Switzerland here – it becomes clear that we are currently facing a "Japan scenario": The population is shrinking, longevity is increasing, and claims on pension fund assets are rising. So we need to brace ourselves for a low-interest environment in the medium term. But it could last even longer, perhaps as much as ten years. The initiative calling for the income earned by the SNB on negative interest rates to be reallocated to pension funds is an example of tackling symptoms. It is the low interest-rate environment that is the headache for pension funds, not negative interest rates.

So you wouldn't be a fan of the initiative recently put forward by State Councilors Paul Rechsteiner (SP, St. Gallen) and Alex Kuprecht (SVP, Schwyz)?
I consider it something of an empty gesture. It won't resolve the problem.

What would happen if central banks were to push interest rates even further into negative territory in the next phase of the debt crisis? Academics such as the Harvard economist Kenneth Rogoff are already talking of negative interest rates in the region of –6%.
It does look as if the system of capital-funded retirement provision as a whole is being tested. I actually don't think that's the case, but the existing pension guarantee – i.e. the assurance that existing pension levels will not be adjusted – is coming under pressure. I don't believe an interest level of –6% is sustainable for any prolonged period of time. Savings and investments have to deliver positive performance. If they can't, our entire economic system will fall apart.

One of the self-inflicted problems of employee benefits insurance at the moment is the huge redistribution of pension assets from the active insured to pensioners – amounting to some CHF 7 billion a year. What consequences is that having for funded pension provision?
An excessive amount of forced redistribution is not feasible in the second pillar. People want to see what they are going to get for the pension contributions they make. As well as the redistribution of assets from active insured to pensioners, there are also redistributions from single people to married couples, and from people without children to parents. Take the redistribution from single people to married couples, for example: Although this likewise involves significant sums of money, it is also largely accepted by society. Some pension funds have recently reacted to this situation by giving their insured members a choice between two different conversion rates: If you opt for a lower spouse's pension – perhaps because a higher pension is not needed, for example – you can benefit from a higher conversion rate.

Many pension funds have responded to the problem of low interest rates in recent years by cutting benefits. Indeed, the CS Pension Fund has also done this. But how low can conversion rates go before the employee benefits insurance system falls into disrepute?
When the legislation for the BVG system was set up, no mechanism was put in place for responding to any increase in life expectancy. But without such a mechanism, the pricing of the system – i.e. the conversion rate – becomes increasingly out of kilter with reality. So it's not a question of whether we are gambling with the legitimacy of the pillar 2 system. It's simply a case of applying common sense: It is a fact that the average life expectancy of the Swiss has increased by around four years since the BVG system was introduced back in 1985. In this context I have a lot of respect for countries like the Netherlands and Sweden, where mechanisms have been introduced for reflecting the increase in life expectancy in the intergenerational contract.

Why do the Swiss have such a problem increasing the retirement age?
Perhaps it's a case of people having been given unrealistic expectations. At the very latest, when the AHV compensation fund reaches the level of zero – something that is likely to occur by around 2030, but potentially much earlier – the Confederation will have to shore up the AHV system with emergency loans or similar measures. By then at the latest, if not earlier, the need to act will be plain for all to see.

The CS Pension Fund has already announced drastic measures with a view to preparing for the future. Among other things, these include significantly lower conversion rates and a requirement to withdraw employee benefits insurance in the form of capital above a certain threshold. Are these measures having any effect?
Yes. One of the results we are seeing is a lower level of liabilities in the pension portfolio for new retirements, as well as lower retirement losses. And that's in line with the strategy defined by our Board of Trustees. Retirement losses should come down consistently over the coming years.

Another step set to be taken is the introduction of so-called 1e pension plans for insured with annual income of more than CHF 127,980. How far advanced are you with this?
With effect from the start of 2020, all contributions to our current retirement capital savings plans will automatically be allocated to the new 1e retirement capital savings plan. What's more, we are offering our members a one-time option to transfer existing pension assets to the 1e retirement capital savings plan. In other words, our insured can have a bigger say in how they structure their pension assets. Specifically, they can choose from a range of six investment strategies for the management of these assets, with a variable equity component ranging from 0 to 75%.

But by introducing 1e pension plans, the employer/the pension fund is also transferring investment risks to the insured. What's your take on that?
Well, the employees enrolled in this scheme are those earning more than CHF 127,980 per year. I’m confident in the ability of these 8,000 or so active employees of CS in Switzerland to make an investment decision of this kind. The 1e plans will help to alleviate the problem of redistribution in the case of higher salaries. Some observers argue that these 1e plans are undermining the principle of solidarity that underpins the second pillar. We still uphold the principle of collectivity in our 1e plan, for example in the form of group life insurance. Anyone who wants to take out individual life insurance in their mid-50s will be required by the insurance company to undergo a health check. And it's quite possible that the insurer will then refuse insurance in the light of this health check. In employee benefits insurance, we offer very attractive benefits without any need for a medical examination. That's not something an individual can replicate.

Many pension funds are taking greater risks when investing their assets, with a stronger focus on illiquid investments. What is the position of the CS Pension Fund here?
We aren't necessarily reacting to this development – we have had a significant proportion of alternative investments in our investment portfolio for quite some time. Indeed, they accounted for 21% at the end of 2018, and that's not including real estate investments.

Hedge funds apparently account for a significant share of your investment portfolio. Are you satisfied with the way they have performed?
The environment has become more challenging for hedge fund managers too. We subjected this asset class to close scrutiny last year, and decided to liquidate two-thirds of the portfolio. Indeed, we may well close the hedge fund program altogether.