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Private pension & health

Better this reform than none

Donald Desax, Head Occupational Benefit Schemes and member of the Group Executive Board of Helvetia, is not terribly keen on the 2020 Pension Reforms. But he still thinks it’s an important first step. A no vote would be disastrous.

20 August 2017, author: Hansjörg Ryser, photo: iStock

An old man with a cane is accompanied on his walk by a woman.
For Donald Desax, it’s a step in the right direction. The vote on the 2020 Pension Reforms is scheduled for 24 September.

Donald Desax, you’ve been advocating a pension system reform in Switzerland for a long time. It’s finally here. Are you satisfied with it?

No, not really.

Does that mean that you are going to vote against the bill on 24 September?

I will put a Yes on my ballot.

Even though you aren’t satisfied with it? You’ll have to explain that.

As a whole, the reform is a reasonable package, a compromise that can certainly attract a majority of the votes. The reform is both urgent and important. If the 2020 Pension Reforms are rejected, we will have to wait years or even decades for the next attempt. Not only will a future reform probably be no better, we are also running out of time!

Opponents say no reform is better than a bad one.

I disagree wholeheartedly: better this reform than none! The worst solution would be to turn up empty-handed after 24 September. There is no alternative. The proposed reform certainly moves in the right direction. It lowers the conversion rate to 6 per cent, aligns the retirement age for women with that for men, and introduces a new type of premium for ongoing pension losses.

That doesn’t sound like a great deal for pension plan members. Pensions are lower, and women have to work longer. Why should I vote for this reform?

OASI and LOB funding is currently unsustainable. If we don’t act soon, both pillars will come crashing down. We can respond to this situation in three different ways: either we work longer, we cut benefits or we pay in more. The reform aims to maintain the current level of benefits because voters won’t get behind the other two options.

If the conversion rate is lowered, various things will have to be done to compensate in the first and second pillar.

That’s correct. Contribution rates are increased slightly, as are pensionable salaries. This produces higher savings contributions, which compensates for the lower conversion rate. Additional things are done to cover the transition years. And the OASI pension increases provide a certain level of compensation. So our pensions won’t be smaller overall. And current retirees don’t have to worry about cutbacks at all.

What don’t you like about this reform?

Legislators have included two provisions that impose a unilateral burden on life insurers and do nothing to advance the reform goals.

And those are?

First, the reform plans to limit risk premiums to 200 per cent of the expected loss. This limitation makes no sense because the insured are entitled to 90 per cent of the income, anyhow. Also, fierce competition has long kept risk premiums reasonable. What also bothers me is that life insurers are the only ones affected by the premium limitation; semi-autonomous collective foundations are exempt. This unreasonably distorts competition. My second concern is the desire to regulate how we allocate surpluses to our customers. This will greatly limit insurers’ flexibility, making it harder for SMEs to find full insurance solutions and potentially increasing their costs over the medium term.

So why are you still in favour of the 2020 Pension Reforms?

It provides considerable relief for the second pillar by reducing the conversion rate in the mandatory insurance system from 6.8 to 6 per cent, changing the reference age for women to 65 and adding a new premium for pension losses. And this relief will primarily benefit plan members. Bear in mind that by our reckoning, retirement capital for each new retiree will have to be increased CHF 34,000 for every CHF 100,000 in order for the pension to last for their entire life. This money comes from today’s workers by paying them lower interest. Without this cross-subsidisation, the interest rate paid on old-age savings would have been 1.6 percentage points higher last year, for example.

And what does reducing the conversion rate to 6 per cent do? Does it eliminate the cross-subsidisation?

Not completely, unfortunately. Assuming a 2 per cent annual return on capital, it only reduces the shortfall to CHF 19,000.

That means that other reforms will soon be needed, right?

Yes. This reform is an important first step, but more steps will have to be taken swiftly. OASI financing is only partially secured until 2030. And the number of pension recipients will rise as life expectancy increases further. In 1970, we had five contributors for every pensioner. By 2040, this number will drop to two contributors per pensioner. This puts an unsustainable financial burden on these future workers.

What if the reform fails?

Then we’ll be at square one again. We’ll run out of time. In Switzerland, pension reforms take decades. We can’t wait that long anymore. If the reform is rejected on 24 September, OASI and LOB will run into growing financial difficulties and politicians will have to take much more drastic measures than currently planned.

What does that mean for Helvetia? Will we stop offering full insurance solutions then?

We will do everything in our power to continue offering a wide range of second pillar solutions to SMEs in this country – from full insurance to semi-autonomous solutions to individual management plans. However, we would have to be much more selective about new business in the full insurance sector, if only to minimise the sources of losses for our current customers.

Donald Desax

Donald Desax

Donald Desax is Head Occupational Benefit Schemes and a member of the Group Executive Board of Helvetia.

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