«The three pillars are not automatically assured»

Until the end of June 2020, Donald Desax was Head Occupational Benefits at Helvetia. Shortly before he retired, a study appeared entitled «How expensive is life if it is always the weekend?», the results of which reflect people’s ideas of life in retirement. In the interview with Donald Desax, we take a look at the study results and his transition to the «third age».

According to the Federal Statistical Office, one in three people in gainful employment in Switzerland finishes work before reaching the official retirement age. Mr Desax, had early retirement long been an option for you?

When I was 30 years old, my idea was to retire at the age of 55 and do something completely different – whether it be writing a book, running my own farm or taking extended trips. Quite honestly, I was not yet thinking about the financial consequences at that time. Nevertheless, I did start building up a third pillar at a young age.

When I was fifty, I made financial arrangements to ensure that early retirement was indeed possible. Over the last few years, my main concerns have been to prepare for a seamless handover to my successor, think about how I wish to hand over the organization and how I can prepare my employees for it. For me, giving prompt consideration to retirement from working life is a necessary part of management and active leadership.

You are not alone in your idea of retiring in your mid-50s. The results of the Helvetia study showed that 12% of the men surveyed would like to retire before they turn 55. The evaluation shows: the younger the participants, the younger they wish to retire. What in particular do young people need to be mindful of if they have such plans for the long term?

I smile as I say that my focus at the age of 30 was also on the age of 55. I think it is great when young people have dreams for their old age. These future dreams are an important engine and source of energy for the present. At the same time, I understand that issues around retirement provision are still a long way off. At the age of thirty, you are definitely occupied with other things such as work or family.

What I would like to see, though, is young people in particular becoming aware that the three pillars of retirement provision are not automatically assured. In the first and second pillar, there will undoubtedly have to be reforms. Either we are prepared to work longer, we pay higher contributions or we have to accept cuts in benefits. Any pension gaps should be made good by making personal provision in the third pillar, which is why I advise starting to build up the third pillar early on. And at the age of 50 at the latest, you need to look at how exactly your life in retirement will be financed, and spot and close any gaps, because at the age of 60, it is definitely too late to do so.

You talk of cuts in benefits and touch on the crisis in retirement provision. What factors are a threat to our current pension system and what effects do you believe we have to expect?

Demographic change is evident on three levels:

1. «Old» people aged 65 and above are living ever longer lives and in better health, which is very nice of course.
2. Over the next few years, all the baby boomers (cohorts through to 1964) will retire. They will therefore be drawing benefits and no longer paying contributions.
3. In Switzerland, far too few children have been and are being born as the workforce of the future. This means that ever fewer people in gainful employment have to fund ever more retirees. Currently, the benefits of one retiree are backed by three people in gainful employment!

This increasingly dramatic imbalance will result in OASI and the second pillar being in urgent need of restructuring. I think that the retirement age will have to be increased in future, even if that is not currently acceptable to the majority of the population. I can well imagine that flexible models will continue to develop. Perhaps it will be possible to work until the age of 70, but on a part-time basis from 60 onwards, for example.  

I have always pointed out to my children, too, that retirement provision is in crisis and is not sustainably funded. I have encouraged them to actively exercise their rights as young people in referendums and place pressure on politicians to interpret the intergenerational contract from a young person’s perspective as well. I do not hold with the view expressed by some young people that they will get no more out of the pension system in their old age. That would be a fatalistic view of things that made any reform seem unnecessary because it would be ineffective. No, in 35 years, there will still be pension benefits from the three pillars, but we need to take action now to ensure that the pension system is sustainably funded and safeguard its long-term future. To this end, legislators should undertake a radical purge and simplification drive in the second pillar in particular, and pension funds should be allowed greater freedom and simplicity in their operations again. Technical and economic inputs such as the conversion rate or the LOB rate of return do not belong in a law or regulation; rather, the foundation board should be able to set them. And the political polarization and management that is a feature of the systematic crisis in retirement provision should quickly give way to pragmatic solutions. Politicians must put party allegiances aside and, as a matter of urgency, offer cross-party solutions. There are ways, but the courage to undertake systematic reform is (still) lacking.

There is not only uncertainty over retirement provision and planning among young people: when it comes to providing for the third age, the Helvetia study showed that almost 30% of those surveyed feel out of their depth. Where do you believe these uncertainties come from? Why is retirement provision a topic that so many find difficult to understand?

By nature, the three pillars and the interaction between them are complex, as there was a conscious decision in favour of a mixture of a pay-as-you-go and a funded system, which by itself is difficult to understand. Financial assumptions have to be made over a number of decades and demographic components also come into play, in particular future population trends. Economic trends, investment options and the long-term returns on those investments are also important. These are highly complex issues that the system has to resolve. There can be no simple solutions here.

One core finding of the study is the gap between financial expectations and realities after retirement. On average, participants anticipate 63.5% of their current income for the third age. That is slightly more than the benefits from the first and second pillar, which according to the Federal Social Insurance Office cover around 60% of the final income. A comparison against the estimated expenses after retirement often reveals a large gap, however.

That is absolutely correct and raises the fear that many future pensioners will feel very frustrated if they have not accumulated any additional savings, as there will be many dreams that cannot be realized in retirement with just OASI and occupational benefits. Neither is that the job of the first and second pillar, quite honestly. Together, they are intended to enable people to adequately maintain their normal standard of living. Their personal provision must step in to fund their additional dreams. 

In Switzerland, pillar 3a and 3b products are considered the ultimate private pension products. As a supplement to OASI and the pension fund, voluntary private provision offers a tax-efficient way of plugging any financial gaps in old age. But young adults under the age of 25 and people in gainful employment with a monthly income of less than CHF 6,000 prefer the savings account to the pillar three products. 85% of those surveyed have a savings account and 60% use it to make financial provision. Why do you think that is? And what effects is this trend having?

Young adults under the age of 25 must first establish themselves in the workplace, want to enjoy their young years to the full and may start thinking about a family. Building up a third pillar is hardly front and centre. And it is easier to use the money in a savings account for consumption, holidays or a purchase. This probably goes for people in gainful employment with a monthly income of well under CHF 6,000 as well. The focus here is on financing the family, the home or the children’s education. Nevertheless, it is highly advisable for this group, too, to pay into the tax-privileged third pillar, as there should always be some money that can be diverted into making personal provision. Plus, a savings account does not have any tax benefits and at present does not yield any appreciable interest either. Therefore, the account is certainly not suitable for long-term personal provision.

A final finding from the study: around a quarter of those surveyed hope that retirement will bring more time for rest and relaxation. What are your plans for the time ahead?

First, I should say that under no circumstances do I want to suffer the typical pensioner’s ailment of the notorious lack of time. While I wish to approach the third age very consciously, I also want to leave a lot open and let things happen. I have set up a small consultancy so that I can share my in-depth knowledge and many years’ experience of retirement provision with various parties. Travel projects are also on the agenda. I will also read a lot and possibly boot up the computer to start my own blog or write a book – I definitely have enough exciting stories in my head. I am also pleased to be able to devote more time to my dear wife, the family and my friends.

Thank you very much for your open and honest answers. We wish you all the best for the next stage in life and keep our fingers crossed for the upcoming projects.