echo interview with Hanspeter Konrad, Director of the Swiss Pension Fund Association (ASIP)

elipsLife echo: Mr Konrad, the Swiss Pension Fund Association (ASIP) represents the interests of over 900 different pension funds. How do you manage to reconcile this array of different interests?
Hanspeter Konrad: Many aspects of the second pillar are crucial for all pension funds, whether large collective institutions or small company funds. I’m thinking here of funding, the principle of partnership-based leadership or the general belief in a strong, collectively organised second pillar.

The ASIP recently called for agents’ commissions for the second pillar to be banned. Why?
The commissions have been a topic for years now. We have nothing against brokers. On the contrary, the issue has to do with the form of compensation: Should the collective foundations that want to grow and seek new employer mandates be required to pay the brokers? Or should it be the contracting entity, i.e. the employer? We take the view that it’s more appropriate for the contracting entity seeking a pension plan solution to finance the broker and not the pension fund. In this case, there would be far less potential for conflicts of interest.

Many in the insurance industry believe that changing the system along these lines and getting rid of commission payments is a step too far. Is the ASIP on its own here?
We’ve discussed this issue in depth within the ASIP. And Individual pension funds have also approached us that don’t don’t pay brokers commission and consequently don’t receive any mandates. As a result, we’re now talking about the problem with the brokers, the insurance association and the social partners. I should mention that the structural reform of 2011 – introducing stricter guidelines regarding governance and transparency for the Federal Insurance Law (BVG) – also demanded greater transparency on broker commissions from the employers’point-of-view. Against this background, volume-related commissions are forbidden. We’ve observed, however, that attempts to put this transparency into practice have only been half-hearted. Consequently, we need to carefully examine the form of remuneration for brokers and modify this process accordingly.

The passing of the pension system tax legislation (Staf) provides Switzerland’s retirement system with a CHF 2 billion cash injection, however the structural problems remain unsolved. Where do you set the priorities in respect to further reforms of the pension system?
The focus needs to be on the discussion to adjust the reference age. And this is likely to happen in the late summer of this year when the Federal Council presents its draft pension system legislation (AHV21). Secondly, incentives should be provided for employees to lengthen their working lives, for example through work time flexiblisation. Thirdly, we have to put he spotlight on funding again. The Staf legislation has admittedly made more funds available for the AHV, but the excessive expenditure remains. So we still have to face the question of whether, and by how much, we can increase value-added tax. I don’t think a further hike in salary percentages is likely since the Staf measure on its own will trigger a 0.3% rise here.

Attempts to reform the AHV have been centre-stage for a while now. Is this an urgent need for the pension funds as well?
The need for a BVG reform is perhaps even more urgent than is the case with the AHV. Following the failure of the AV 2020 vote, our association has taken the initiative and is now pushing for reforms. We’ve already tabled proposals designed to spur a BVG reform (see www.asip.ch: ASIP-Vorschlag für eine BVG-Reform). The focus is on the excessively high BVG conversion rate, which today stands at 6.8%. The pension funds – especially the well developed ones with a large non-obligatory scope and room to manoeuvre – have done their homework and have already drastically lowered conversion rates in the voluntary space. Now the conversion rate urgently needs to be adjusted for BVG mandatory pensions as well.

What are the biggest challenges for the second pillar?
As far as funded provisioning is concerned, there’s the negative impact from the continuing low interest rate environment, the impact of which is amplified by negative interest rates. Secondly, we have rising life expectancy. Since we’re all living longer on average, the pension funds have to pay out for longer periods. This is leading to the familiar redistribution of resources from the the younger generation of insureds to those already drawing pension income, a situation the system was not designed to cope with. Asymmetry like this needs to be corrected, especially in regard to those pension funds more closely tied to the BVG. Look, at the end of the day we have to face the socio-political challenges here: For example, how far can we push individualisation in a provisioning system basically geared towards the needs of everybody?

In your view, should current pensioners be asked to help recapitalise the old-age provisioning system – or are already acquired pension entitlements taboo?
We’re not in favour of cutting back current pension payments. The parametres, which have been used for decades now to determine pension payments are the root of the problem. To reduce current pensions instead of adjusting the parametres would undermine the very foundations of the system. Moreover, this would be tantamount to a disavowal of earned entitlements. Financial participation schemes would be the more sensible solution. Boards of trustees could establish rules whereby earnings would only accrue to those pensioners who entered retirement with a lower conversion rate.

Where do you stand on a retirement age of 65 for women...
The same retirement age for men and women has to come. This measure was part of the AV 2020 draft legislation and the ASIP supported this. And we’re also backing its inclusion in the AHV 21 reform package, which the Federal Council will probably place before parliament in the late summer.

...and where do you see the retirement age in 10 years?
From a retirement age of 65 for both men and women, I see the upward trend continuing. The question is how quickly one can move from 65 to, say, 67. There are several models possible here, for example linking the process to life expectancy or to the length of one’s working life.

Regulatory restraints mean that pensions funds’ investment strategies have very little room to manoeuvre. Given the difficult economic environment, do you think they need more freedom?
Our association does not believe that getting rid of investment ratios will improve earnings potential. And many boards of trustees agree with us. It’s not the fault of the current system when a fund only achieves weak investment results. You only need look at the investment performance figures in recent years. Much more important than talking about ratios are clearly defined processes, competencies and responsibilities in regard to the management of assets.

In your view, how high should the conversion rate be in the mandatory space?
There’s no doubt it should be below 6%, and from an actuarial point-of-view even close to 5%. In our discussions, we’ll be advocating a level of 5.8%. Admittedly, this is still too high given a technical rate of 3.4%. However, we do need to bear in mind what’s politically feasible and not just argue from an actuarial viewpoint.

The number of in-house pension funds is continually shrinking with the trend moving towards collective foundations. Will this development continue?
Unfortunately, I believe it’s very likely to continue. In recent years, the complexity of the system has been steadily increasing. And the challenges faced by the governing bodies of pension funds are becoming formidable. Consequently, many employers are inclined to amalgamate their pension funds into larger units rather than to maintain their own in-house solutions.This is a regrettable development.

Should the state do more to support the third pillar in order to ease pressure on the first and second pillars?
We shouldn’t play the pillars off against one another. Each pillar has its strengths and weaknesses. The ASIP wants a strong second pillar. If ways can be found to improve third pillar benefits, we’re certainly not going to stand in the way.