echo interview, May 2021

Excessive guarantees are problematic for pension funds

ELIPSLIFE ECHO - INTERVIEWS WITH PROMINENT BUSINESS LEADERS

echo interview with Vera Kupper Staub

echo interview with Vera Kupper Staub, President of the Supervisory Commission for Occupational Pension Plans (OAK BV)

elipsLife echo: Ms. Kupper Staub, the primary goal of the OAK BV is to strengthen confidence in occupational pension plans. This confidence now seems battered, to say the least. Or how else can you explain why retirement provisioning has long been such a worrisome topic for Swiss citizens?
Vera Kupper Staub: The AHV’s financing difficulties are certainly more pronounced in the population than those confronting the 2nd pillar. That said, the 2nd pillar stokes concern as well, especially since there’s an urgent need to lower the currently applicable conversion rate. In contrast, surveys conducted by pension funds among their policyholders reveal a different picture: Trust in one's own pension fund hasn’t suffered. So apparently people distinguish between the general topic of retirement provisioning and their own pension fund.

OAK BV was established on Jan. 1, 2012, more than 25 years after the introduction of occupational pension plans in Switzerland. Were irregularities in the handling of pension assets the reason for the creation of OAK BV?
The BVG, as the law governing pension funds, is a federal statute. However, the supervision of pension funds is regulated on a cantonal basis. Consequently, since many funds operate throughout Switzerland, the cantonal supervision to which they’re subject is often almost random. In the meantime, many cantons have joined forces, so that today we have a total of eight supervisory regions. However, these supervisory authorities haven’t been able to reach agreement on certain issues. The handling of partial liquidations would be one case in point. The founding of the OAK BV was consequently not the result of irregularities in the handling of pension assets, but rather driven by the desire for uniform application of underlying legal principles.

How would you describe OAK BV’s tasks?
It has three areas of responsibility: First, we’re the supervisory authority for the eight regional supervisory bodies, ensuring they perform their duties in a materially uniform manner. Second, we’re the licensing authority for the pension funds’ actuarial experts. We’re authorised to issue instructions both to them and the auditors. And third, we’re the regulatory authority for the investment foundations and the security and contingency funds. In other words, we oversee those pension funds that accept employers with their insured persons who can’t otherwise be accommodated.

Graph showing Vera Kupper in a discussion

Your commission is tasked with ensuring uniform supervisory practice throughout Switzerland. How do you do that?
On the one hand, we maintain a regular exchange with the regional supervisory authorities on current relevant topics. On the other, we issue directives and notices to the supervisory authorities, actuarial experts and auditors should there be any uncertainties surrounding specific issues.

Are you satisfied with the work of the eight regional direct supervisors - or are there still some problems to be solved?
When OAK BV was introduced in 2012, enthusiasm among the regional supervisors was limited. No one is overjoyed when a new player comes on the scene and tells everyone how to do their job. Pension funds have been around in Switzerland for more than a hundred years, so they’ve been supervised for a correspondingly long time. Before we appeared, the regional bodies already had a great deal of experience and established processes. So we first had to get to know one another. Today, we work together constructively.

What instruments does OAK BV have at its disposal to take action against black sheep among pension funds?
OAK BV does not take action against individual black sheep. As far as the rules and regulations allow, this is the job of the regional supervisory authorities. They have certain tools at their disposal. The measures can go as far as the removal of the foundation board. I should point out, however, that OAK BV has nothing to do with individual cases.

OAK BV is mandated to ensure the improvement of system security in a consistent fashion. But demographic developments, the interest rate environment and the reform backlog in politics are pointing in the opposite direction. Given this backdrop, where do you see the greatest risks for the development of the pension funds?
Pension funds are supported through a funded system. This means they use the contributions of the insured and their employers, plus the income generated from investing these funds, to finance pension payouts. As you can imagine, in an environment of negative interest rates, this is a tough challenge. In addition, we have guaranteed benefits in Switzerland with a legally fixed conversion rate. The fixed conversion rate is based on the assumption that interest rates and life expectancy remain more or less constant. However, developments over the last 30 years have shown this assumption to be increasingly out of sync with reality.

All that said, the pension funds have thus far been able to cope relatively well with these changes because the fixed conversion rate only applies to the mandatory portion of the pension fund assets. On average, however, this portion only accounts for around 40% of an insured person's assets, with 60% being in the extra-mandatory portion. This has given the pension funds flexibility, and as a result the average conversion rates today are much lower than the 6.8% stipulated by law, below 5.5% on average. In order to keep the benefit level as stable as possible, contributions have had to be increased. The leeway provided by the extra-mandatory area has allowed the funds to adapt to the changing environment. But the longer this situation continues, the narrower the wiggle room becomes.

As part of the reform of the old-age pension system (AHV), Switzerland’s Council of States has approved raising the retirement age for women to 65. What’s your take on this?
For me it's obvious that the retirement age has to rise, for women as well. Since the introduction of the mandatory pension fund system in 1985, life expectancy in Switzerland has risen by around 5 years. Today, a retiree receives a pension for an average of 20 years, that’s 33% longer than calculated when the system was first introduced. So adjustments are needed here.

The Federal Council also wants to reform the occupational pension system (BVG) by reducing the conversion rate from 6.8% to 6.0%. The resulting pension losses are to then be offset by a supplement financed via deductions from wages and salaries. Is this the right approach?
It would be alien to the system to introduce a 1st pillar pay-as-you-go concept into the funded arrangement of the 2nd pillar. I’m not saying we can’t learn new ways of doing things, but this idea would run counter to what was originally intended. Personally, I have a problem with wanting to stop the redistribution from the active insured to the pensioners by lowering the conversion rate, if at the same time we introduce a new element that in fact re-institutionalises this redistribution.

Should pensioners participate in the restructuring of the pension system, or are acquired pension entitlements a no-go area?
That is definitely a taboo. Pensions must be reliable and stable. However, the system must be balanced in such a way that the guaranteed pensions can be financed at low risk. If the guarantees were at a realistic level, there wouldn’t be an issue. But if the guarantees are too high, the pension funds have a problem.

Is the impact of the Covid-19 crisis already visible on pensions?
In spring 2020, the massive stock market slumps were already leading to significantly lower coverage ratios for many pension funds. As long-term investors, however, the pension funds didn’t panic sell, but instead purchased shares at the lower levels. As a result, they benefited significantly from the subsequent market recovery. So in terms of coverage, the pandemic hasn’t yet had any negative consequences. And we haven’t seen any major effects on mortality either. A large pension fund in German-speaking Switzerland told us they hadn’t experienced any excess mortality in 2020 - unlike during the heatwave of 2003.

Personal Profile

Dr. Vera Kupper Staub

President of the Supervisory Commission for Occupational Pensions (OAK BV)

Born in 1967, Vera Kupper Staub completed her studies in economics at the University of Zurich with a dissertation in financial market theory. She started her professional career in 1992 as a consultant to pension funds in the investment area. From 2000 to 2010, she headed the investment division of the City of Zurich’s Pension Fund. She was a member of various boards of trustees and Vice President of OAK BV from 2012 to 2019, before taking over the chairmanship of its Supervisory Commission in 2020. Kupper Staub lives in Zurich, is active in the Die Mitte party and chairs the Economy and Society Working Group (AWG) of the Canton of Zurich.