“Generations have to pull together”

Switzerland needs to raise the retirement age and lower the conversion rate for occupational pensions. Of this, UBS Economist Veronica Weisser is convinced. Ideally, it should do both.

Ms. Weisser, in your view, Switzerland's system of pension provision is outdated. Why?
Because the AHV was created in 1948 with quite different goals in mind than are currently pursued by the retirement system. Back then, "old" was synonymous with "poor" in Switzerland. The idea behind the introduction of the pension system was to combat this poverty. The primary objective was welfare, i.e. support in cases of financial hardship.

Today the main concern is providing for a comfortable future, in other words, being able to maintain one's standard of living in old age.
Precisely. Those are two very different goals, and the way they are combined within a single system is problematic from an economic point of view. You see, while welfare is concerned with redistributing wealth from rich to poor, provision for the future is all about making limited savings go as far as possible in old age. These are two quite opposing philosophies.

Why is this problematic?
It leads to false incentives and ultimately to a proliferation of redistribution. Whereas in the first pillar, the AHV, money is redistributed from rich to poor, from men to women and from the married to the unmarried, in the second pillar, occupational benefits, it often works in the opposite direction: from the unmarried to the married and on average from lower to higher incomes.

Why is that?
In the latter case, the reason is that high income is correlated with increased life expectancy. People with higher incomes thus benefit longer from their occupational pensions and, viewed in absolute terms, they also benefit more from the second-pillar conversion rate which is currently too high.

The conversion rate defines what percentage of your savings in the second pillar can be paid out to you each year after retirement.
Exactly. And unfortunately this rate is clearly too high in Switzerland. For mandatory savings, it stands at 6.8 percent; all this means is that people who have a life expectancy of more than 16 years at the time they retire will draw more money than they have actually saved. Unless they managed to generate an above-average returns on their pension fund capital. The conversion rates are generally lower for savings outside the mandatory area, but they are still too high on average.

So our life expectancy is higher than has been factored into the conversion rate?
Yes, and life expectancy is still underestimated by many people. Most of us know that men in Switzerland generally live to about 80 and women to about 85. But that is the life expectancy at birth. By the time they retire, men are expected to live until the age of roughly 86 and women to 88. This means considerably more years of drawing a pension than the 16 years covered by the conversion rate given moderate returns. And that number is increasing every year. A rule of thumb says that every ten years we gain a further year in terms of life expectancy.

As nice as that may sound when viewed in isolation - in the medium term it presents us with major challenges.
Yes it does. And we are only just seeing the beginning. The generation of baby boomers, i.e. those born in the postwar period between 1946 and 1964 when birth rates soared, started retiring in 2010. The majority of this generation, however, is still supporting the system of retirement provision with its contributions. But the situation will be reversed over the course of the coming years. By 2040, for each person drawing a pension there will be only two to three people working and paying in. This fact presents any pension system - even one as good as Switzerland's - with tremendous challenges.

What does this mean for the younger generations in Switzerland?
First, that they will have to be well educated and productive if they are going to shoulder the great responsibility of financing these pensions - given that they are a much smaller generation. And second, that they will have to plan their own retirement provision realistically and engage with the topic of "private provision" at an early stage knowing that the state will only be able to support them to a limited extent.

What will older generations have to expect? A higher pension age?
We need to look certain realities in the eye. Without the support of today's 45- to 65-year-olds beyond the current retirement age, we will be forced to accept a significant decline in prosperity as a society. What's more, the retirement age of 65 has not changed since 1948, except for women where it is slightly lower than before at 64. There is no possible explanation for this. Today's generation of 65 year olds is healthier than ever before at that age. You can view a higher retirement age as a chance or as a burden. I prefer to look on it as an opportunity.

What do you believe the banks can do to help?
With a well-structured advisory process such as that of UBS, banks can help us to assess our asset situation correctly - both at present and after retirement - and to make realistic assumptions regarding the pension payouts we can expect. This also entails rigorously implementing any measures required, such as increasing the amount saved or adapting the investment strategy.

As part of its "Pensions 2020" reform program, the Federal Council is proposing to raise the retirement age for women to 65 and to lower the minimum conversion rate from 6.8 to 6 percent. Will this be enough?
Both measures aim in the right direction, but do not go anywhere near far enough. Moreover, they place the burden squarely on the younger generations. To find solutions for the growing problems in our pension system, all generations have to pull together and contribute to the solution.