InterviewRealignment of the Pension Fund as of January 2017
Realignment of the Pension Fund as of January 2017
Martin Wagner, Manager of the Pension Fund of Credit Suisse Group (Switzerland) explains in an interview the background to the strategic realignment as of January 1, 2017.
How is the Pension Fund faring?
As of the end of 2015, we estimate the funding ratio of the Pension Fund to be approximately 110%. At first glance, this is a good financial position. However, the fluctuation reserve, which is aimed at softening the impact of unfavorable developments in financial and capital markets, is only about half established. The funding ratio also contains the assumption – and therefore the pressure – that we will generate an average performance of between 2.5% and 3% in the coming years. That is a very ambitious target in the current low interest rate environment. With an economic valuation of our obligations, i.e. at a market interest rate, the funding ratio would be much lower. A more detailed examination therefore shows that the financial situation of the Pension Fund is rather difficult.
What challenges is the Pension Fund facing?
We pay pensions worth more than CHF 40 million every month. Low interest rates weigh on our cash holdings because we used to be able to finance our pensions largely with earnings from bonds. Not anymore. In addition, pensions need to be paid for longer given the level of aging in our society.
What impact does aging in society have?
People are living longer and longer. Insurance mathematicians expect life expectancy to increase by one month a year, with a rising tendency. For us as people, longer life expectancies are, of course, a positive thing, but they come with consequences for pension funds.
Could you explain what these are?
The costs for the longer period of pension payments are increasingly having to be borne by the active insured. Pensioners are being cross-subsidized more and more by the active insured, although the capital-funded employee benefits insurance is not designed for a redistribution between the generations.
Can you put a figure on the costs that the active insured cover?
Overall, we are talking about a redistribution in the range of more than CHF 100 million a year. A redistribution arises for new pensions, for current pensions as well as for different interest rates on retirement assets.
In the case of future retirement pensions, a financing shortfall will occur if the pension fund assets accrued are converted to a pension at too high a conversion rate. This loss can no longer be corrected subsequently because the amount of the pension may no longer be reduced by law. For current pensions, the redistribution is the result of inadequately reflected life expectancy.
An unwanted redistribution also results when the retirement assets of the active insured and pensioners have different interest rates over a longer period of time, as has been the case with our Pension Fund in recent years. The active insured were forced to do without part of the interest for the benefit of the older generation. Although the Board of Trustees aims to treat the generations equally, its room for maneuver is limited.
Why is that?
With the performance generated, first the current pensions and the rising life expectancy are funded. In addition, a considerable part of the performance is used to create reserves and provisions in particular to establish the fluctuation reserve. After financing the current pensions and reserves, the Board of Trustees decides on the interest rate for the pension assets of the active insured.
On average over the past five years, the Pension Fund generated an annual performance of 4.7%. Over the same period, the pension fund assets of the active insured had an interest rate of 2.4% per year. The difference was used to both finance the redistribution and increase the fluctuation reserves.
How can you ensure the balance between stakeholders in the future?
Redistributions between the generations that are alien to the system ultimately jeopardize the financial stability of the Pension Fund and make the fairness aimed at impossible. For this reason, the Board of Trustees decided to make strategic adjustments that take into account the changed economic and social environment, and to take account of the numerous challenges of the future.
What changes were decided on in particular?
The technical interest rate was cut from 3% to 2% as of the end of 2015. At the same time, we replaced the static period tables used in the past with generation tables. Generation tables automatically take into account the future development of life expectancy and are therefore more meaningful. Applying the generation tables shows that the conversion rates used in the Pension Fund fail to adequately reflect current life expectancy. To maintain the stability of the Pension Fund, the Board of Trustees decided to take into account the new framework conditions by reducing the conversion rate. To ensure that this does not have an excessive impact on any particular age group, the reduction will be phased in gradually over the next eight years.
In addition, we are changing the standard retirement age of 63 to the reference age of 65. The savings process in the Pension Fund can therefore be continued up to the age of 65. It goes without saying that flexible retirement from the age of 58 up to a maximum age of 70 continues to be possible.
For those insured who are about to retire, this news is not so pleasant …
That is true. However, given the low interest rate environment and continuously rising life expectancy – factors that are both challenging for pension funds – it will not be possible to continue financing the high benefit levels in their current form in the future. For this reason, the Board of Trustees of the Pension Fund has acted and decided to make these strategic adjustments. It was important for the Board of Trustees that all insured make their contribution. The costs must not be borne exclusively by the younger active insured.
The new pension plan offers improved benefits in the event of disability and death. Disability and surviving spouse's pensions are now derived from the pensionable salaries in the Pension Fund and do not depend on the assets accrued in the Pension Fund. A reduction of the retirement capital, for instance due to an advance withdrawal within the framework of the promotion of home ownership or a transfer due to divorce, no longer results in lower death and disability benefits. During gainful employment, the insured and their family members are very well covered against the financial consequences of disability or death. Now, this cover also applies for cohabiting partners. Our insured voiced this need and we have met it.
Are further strategic adjustments planned in the near future?
From 2018, we are planning to roll out individual investment strategies for those insured with a total remuneration of more than CHF 126,900. Individual investment strategies make the pension attractive thanks to their higher potential returns in the long term and allow the insured persons to opt for an investment strategy that corresponds to their personal risk tolerance.
What does the Board of Trustees hope to achieve with these adjustments?
The adjustments have several objectives. The overriding aim of the Board of Trustees, the Executive Board and the employer is to preserve the Pension Fund's financial balance over the long term. For that reason, long-term strategic adjustments were initiated with a view to the future in order to address current and future challenges. The new generation tables, the lower technical interest rate and the reduced conversion rates contribute to easing the situation in the future as well as minimizing the redistribution from active insured to pension recipients.