Global professional services firm Towers Watson recently published its biennial study on the status of the pension funds of the 30 firms in the Swiss Leader Index. The headline result for the 2015 was a first-ever reduction in the pension benefits disbursed by SLI firms.

The Towers Watson SLI Benchmarking Study compares pension plans and the benefits paid out under the plans. The study takes the main features of the pension plans of the firms that make up the SLI and compares actual benefit levels. Of note, 27 of the 30 companies in the index participated in the 2015 study.

Pension Funds Hedge Funds Pension Benefits

Swiss corporate pension benefits decrease by 3% in 2015

The new TW report notes that conversion rates and technical interests have dropped in the most recent SLI Benchmarking studies, suggesting that SLI pension funds are taking steps to mitigate the lower investment returns and rising life expectancy noted of late. The average conversion rate of all surveyed firms was 6.05% for retirement at age 65 for 2015. This compares with a much higher 6.32% rate at the time of the last study in 2013.

Apparently a growing number of companies are “accepting that there is a big difference between the conversion rate for mandatory retirement savings, at 6.80%, and the rate for super-mandatory savings. That is why the final conversion rate under pension fund rules is – sometimes markedly – below 6.80% for 95% of companies.”

The TW report also highlights that technical interest rates (used as a discount rate to value expected future pension payments in the annual financial statements) will likely decrease. Technical interest rates currently range from 2.00% to 3.75%; the average close to 3%. However, a new reference technical interest rate was set by law at 2.75%, which means 60% of pension funds will need to make adjustments.

Of the greatest concern is that despite retirement benefits remaining relatively stable despite falling conversion rates in 2011 and 2013,  this is no longer the case today. The average benefit decreased for the first time in 2015, by an average of about 3%.

“We expect to see a change. Lower benefits because of a fall in conversion rates are tolerated and no longer necessarily offset with higher contributions”, Peter Zanella, Head of Retirement Solutions at Towers Watson, commented regarding the decrease in pension benefits.

Because of relatively strong returns and an improved financial situation, Swiss pension funds were able to pay out interest above the government mandated rate. The minimum BVG interest rate was 1.75% in 2014, but active members received an average rate of 2.66% on their retirement benefits. The broad range of rates, from 1.25% to 5.50%, however, makes clear the significant differences in each of the pension schemes.

This means that retirement benefits should definitely be considered as a part of the job search process, because there are major differences between pension plans.

The report notes: “For employees currently aged 25, the pension they would receive from the company with the best pension plan would be around 2.2 times higher than the BVG statutory minimum, and only around 1.3 times more from the company with the lowest pension plan benefits. This difference expands as the age and income of the employee, and the vested benefits he/she transfers in upon entry into the pension fund, increases.”

More flexibility in Swiss pension plans

Pension plans are continuing to become more flexible. A growing number of firms are designing plans to give the insured a choice between up to three different employee contribution rates. Compared to the 2913 study, the percentage of surveyed firms offering this feature has increased by 4% up to to 60%.

“This flexibility can make a plan more attractive to insured employees because they can adjust their contributions to suit their personal situation and acquire more or fewer retirement benefits”, notes Nathalie Munaretto, a consultant and co-author of the TW study.