UBS Vorsorgeforum: Small reforms that spark big emotions

UBS Vorsorgeforum: Small reforms that spark big emotions

Zurich14 dic 2021, 10:00Media Switzerland

The Swiss capital-funded occupational pension system has been morphing into a "pay as you go" scheme. Reforms are needed to prevent this unintended redistribution, but achieving consensus requires a balancing act, as the costs and benefits of change will not be evenly distributed across the different generations. A new UBS study shows the impact of adjusting the main levers of the second pillar on individual households.

Zurich, 14 December 2021 - The second pillar is drifting away from sustainability and fairness, a shift that is most heavily impacting the young. This situation can and should be rectified through reforms. However, enacting such change is rarely straightforward, as the topic of retirement has become emotionally and politically charged. The latest UBS report "Second pillar: Stuck in a stalemate" explores the impact of various potential changes on disparate Swiss households.

Change can be a good thing

The second pillar could become fairer and more sustainable if its main levers were adjusted, namely the contribution period, the contribution rates, the contribution basis, and the conversion rate. It comes as no surprise that contributing more and for a longer period of time would lead to higher pension benefits for everyone. This can be achieved by lowering the coordination deduction or the entry bound, thereby increasing the coverage for part-time workers and low earners. Starting to contribute earlier or raising the retirement age would prolong the contribution period, with the latter option especially effective in raising overall pension savings. In addition, keeping contribution rates rather flat across age groups would improve the attractiveness of senior workers in the labor market.

But challenges abound. For instance, working longer may not be possible for everyone because of the mental or physical fatigue associated with certain types of jobs. Larger contributions mean less disposable income, which can severely reduce the savings or discretionary spending potential of some workers. Bigger contributions also imply a higher cost of employment, in turn leading companies to increasingly consider offshoring or automation.

The need to compromise and move forward

While the above discussed changes are less controversial, the reduction of the conversion rate is quite contentious. At 6.8%, the current conversion rate far exceeds the actuarial one and is no longer in sync with life expectancy and financial market realities. Lowering it would reduce intergenerational redistribution, but also raise several key questions: Who will be impacted by a change and to what extent? And what compensation measures will be implemented?

"The majority of workers should not experience any changes in their total contributions or expected benefits," says James Mazeau, an economist at UBS. Indeed, around 80-85% of account holders are insured in pension funds that go beyond the minimum requirements of the law. Nonetheless, reform proposals that include various measures mentioned above are currently under discussion in Parliament and could make the second pillar fairer and more sustainable.

But nobody should be left out in the cold. Indeed, as UBS economist Jackie Bauer points out, "for the minority of workers close to retirement who will bear the brunt of reforms, some form of transparent, targeted, and reasonable compensation is necessary." Measures to lower the conversion rate will be effective immediately, whereas measures to counter such reductions (e.g., changes to the contribution period) will only bear fruit over a longer period of time. Compromise is needed if we're to take a first step in the right direction toward ensuring future generations' retirement security. Moreover, any change implies that in order to maintain a given level of future benefits, everyone will need to increase their savings efforts - starting today.

UBS Switzerland AG

Contacts

James Mazeau, CFA
CIO Retirement & Public Policy Research
UBS Chief Investment Office Global Wealth Management
Tel. [phone]
[e-mail]

Jackie Bauer, CFA
Head CIO Retirement & Public Policy Research
UBS Chief Investment Office Global Wealth Management
Tel. [phone]
[e-mail]

Links

• www.ubs.com/vorsorgeforum/en
• www.ubs.com/media
• Media releaseDownload PDF