The “classic CV” has become more the exception than the rule nowadays. Employees no longer stay with the same company from cradle to grave, or apprenticeship to retirement. Likewise “till death us do part” applies to only every second married couple today. But in spite of the massive lifestyle changes of recent years, Switzerland’s occupational pension scheme – the so called second pillar (of the three pillar system alongside state cover and private pensions) – gives policyholders few opportunities to fashion their old-age provision to their needs and conditions.
Linking pension provision to employees
Employees could improve their occupational pension options if they were allowed to select not just their investment strategy, but also their fund manager. Such choice would prompt pension funds to tailor products more closely to individuals’ needs. The increased competition that might ensue might also prompt cost savings and consolidation in a highly fragmented sector: today 1,500 tiny funds still manage 17 per cent of savings.
The free choice of pension fund enables insured people to invest according to their needs. (Wikimedia Commons)
Free choice would also benefit the 350,000 people who work for more than one employer. Despite earning well above the entry threshold for occupational pension cover, such staff are often excluded because of deductions based on their multiple employer status. Combining their total wages into a single pension fund would greatly improve their position.
Free choice would also allow contributors to diversify pension and job risks. Not long ago, many pension funds lacked sufficient reserves to cover value fluctuations, leaving some underfunded. So if a company, for example closed part of its production or relocated abroad, shedding workers in Switzerland, its occupational pension fund would have to be partially liquidated. If underfunded, that would mean employees losing not only their jobs, but also part of their retirement savings. By linking pension provision to the employee, not the employer, such risks could be separated.
Individualisation strengthens the social contract
Pension reforms designed to tailor schemes more closely to individuals’ needs are sometimes decried wrongly as a threat to the “social contract.” In fact, pension funds’ steering committees have to spend a great deal of time on investment strategy. If instead contributors would choose their fund, the workers, trade union officials and employers on such committees could devote more time to important issues like recruitment, training or digitisation.
Critics also claim more individually tailored schemes blur the differences between occupational pensions (Switzerland’s second pillar) and private retirement savings schemes (the voluntary third pillar)
But a far greater risk lies in the excessively generous conversion rate applied when second pillar savings are translated into annuities on retirement. The result today is that younger contributors, instead of building up their own long term pensions savings, are actually being asked to finance today’s pensioners in an effective “pay-as-you-go” scheme. That, in theory, should apply only to the first pillar, the mandatory state pension, in the Swiss three pillar system.
Switzerland’s pension issues are not unique: many countries have been considering giving pensioners greater rights and flexibility to decide on the allocation and use of their retirement savings. Britain, for example, has seen a thoroughgoing liberalisation.
But Switzerland is pioneer in its three pillar system of state, occupational and private cover. The Swiss system still has much scope for reform, particularly in terms of contributors’ and pensioners’ freedom of choice. The free choice of investment strategy or, in the long term, pension fund, would remind employees the capital saved belongs to them, not to their pension fund or employer – and certainly not to the state. More possibilities to design occupational pension plans based on individual needs are the best guarantee against the gradual transfer of the second pillar into a pay-as-you-go model.
