In the spotlight: occupational pensions
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Chairman of the Board of Trustees of PwC’s pension fund and COO/CFO of PwC Switzerland
So what is the ‘right’ conversion rate? Given that we can’t predict with any certainty whatsoever the basic assumptions – investment returns and pensioner life expectancies – that will apply for the next 20 or 30 years, how are we supposed to work out the right conversion rate? Once you set the conversion rate you can adjust it upwards, but only in certain circumstances can you can adjust it downwards. That means you can’t afford to set the rate too high. As far as mandatory pensions are concerned, the decision lies with the sovereign power, in other words with the people. This could result in a one-sided bias towards the interests of pensioners. The political authorities and business must make due preparations and find ways of assuring the solvency of pension funds.
The authority over and responsibility for the extra-mandatory component lies with a pension fund’s board of trustees, which equally represents the employer and the employees. The trustees have to weigh up the various interests carefully.
Seen in a sober light, the fact is that it’s impossible to set the ‘right’ conversion rate. There will always be a conflict of interest, and the circumstances will always turn out differently from what was originally expected.
The trustees of PwC’s pension fund have opted for measures to reduce the redistribution that will also be advantageous and understandable for the people already receiving a pension. Their pension income remains plannable. While the model adopted involves a significant cut in fixed pensions, it added a variable bonus component, which is determined periodically by comparing budgeted and actual returns. In other words, the bonus component may be cut if returns are insufficient, but it may also be raised if returns are good. This way it’s possible, to some extent, to adjust the conversion rate on an ongoing basis. The positive side-effect of this approach is that it indirectly links pensions to inflation, as inflation tends to be higher when interest rates are high – and vice versa. At first, PwC’s new model was only implemented for new retirees whose pension started in 2005 or after. Necessary cuts in conversion rates for future retirees, by around 50%, and expectations of low returns, mean that new retirees need more capital to finance their own retirement. For this reason the board of trustees wants to limit the redistribution by also applying the pension model to current pensions (existing retirees). In other words, the pensions of people who have already retired will be adjusted in line with returns. This does not constitute a remedial measure, but rather a switch to a more appropriate system. The result is that all pensions are indexed – and the redistribution effect is reduced.
The system underlying the model and the way it functions are described in part two of this articleDynamic pensions.
The general outlook for Swiss pensions is not particularly bright. So it’s all the more important to find financially sustainable solutions to the problems faced by the second pillar – solutions that don’t put younger generations of active members at a disadvantage. At PwC we have opted for a dynamic model geared to the reality that takes account of the interests of both pensioners and active members. This is our way of taking responsibility not only for our pension fund, but for the future of our society.