UBS Pension Forum – Retirement Monitor 2016 and private retirement savings in a time of negative interest rates
Approximately one-third of all Swiss expect that their retirement income will be more than 90% of their last pre-retirement salary. But only 52% of the survey respondents save privately for retirement through a pillar 3a account. These are some of the findings of the new "UBS Retirement Monitor 2016" that was compiled together with gfs-Zürich. Successfully investing private savings for retirement has become increasingly important to meet the high financial expectations during retirement. UBS now recommends an age-specific investment strategy for retirement savings.
Zurich, 13 September 2016 – The Swiss pension system is under pressure. The OASI (German AHV) has a negative operating result, and coverage ratios of pension funds are falling. At the same time, participants receive only minimal interest in pillar 2. The new representative survey "UBS Retirement Monitor 2016," which has been prepared together with gfs-Zürich, investigates for the first time the financial expectations for retirement and the options for private retirement savings, freely available assets and the individual savings rate.
The results show that the financial expectations for retirement are high, despite the uncertain future of the pension system. For example, 67% of the survey respondents expect that their income after retirement will cover more than 70% of their last salary. About one-third believe it will cover more than 90%. The expectations fall for survey respondents of higher age. On a regional comparison, it is clear that Swiss in the French- and Italian-speaking parts of the country have higher expectations than residents in German-speaking Switzerland do. As these expectations most likely cannot be met, pillar 3a takes on a more significant role. However, only 52% of the survey respondents make use of pillar 3 to save for retirement. The main reason cited for using pillar 3a was the tax saving benefit, while the second most frequently given reason was the need to supplement the first and second pillars. Not enough money or part-time work were cited as the main reasons for the lack of a pillar 3a account.
Not enough individual responsibility despite high expectations
Of the 52% of the respondents who use pillar 3a, 66% have only one pillar 3a account, while 33% have several. Those who save through several pillar 3a accounts are predominately men, persons from German-speaking Switzerland and persons with a monthly income greater than 7,000 francs. Of those who save for retirement through one or more pillar 3a accounts, only 21% invest their pillar 3a savings in securities. Men (26%) tend to invest their 3a savings in securities more than women (16%). In terms of language regions, French-speaking Switzerland, at 27%, tends to invest more pillar 3a savings in securities than other regions do. In contrast, Ticino (9%) prefers the interest account compared to the custody account solution.
A large portion of the Swiss population (45%) still has funds available for saving at the end of the year after deducting all expenditures (including pillar 3a contributions). Although 15% could save, they prefer to spend, while 40% do not have enough money to save. German-speaking (46%) and French-speaking Switzerland (45%) in particular have money left over at the end of the year to save. In Italian-speaking Switzerland, more than half of the respondents (58%) stated that they are unable to save. Specifically, 56% of the survey respondents are able to save more than 5,000 francs at the end of the year after deducting all expenditures.
Investment strategies for retirement savings for various age groups
Retirement savings are subject to special considerations with regard to their security. However, investments that traditionally have been secure, such as Swiss government bonds, now have negative interest rates, meaning that savers take a loss on these investments. Returns on pillar 3a accounts have plummeted as well, from over 2% in 2010 to the current average of 0.5%. The low interest environment is forcing people who are saving for retirement to rethink their strategy for increasing expected returns
Limit the risk of loss
The focus should not be on fluctuations that, for example, equity investments are subject to, but rather on the end result. The main objective of retirement savers – preserving the value of their assets – is achieved if at the end of the investment horizon there is at least a 90% likelihood that no loss will occur, based on model calculations. Retirement savings offer an opportunity here. The often long investment horizon until retirement age is reached clearly reduces the likelihood of a loss and offers the possibility to generate positive returns. The UBS age-specific investment recommendations apply to both ongoing savings contributions made during the relevant age span and current retirement savings. It is important to note that the invested retirement assets should be held in the relevant portfolio structure until the end of the savings period (at least until age 65). Any savings contributions added at a later stage should be made in line with the age-specific recommendations (see figure for overview).
Figure: Recommended portfolio structure by age range
By starting to save early, you can hold a larger equity allocation over many years and can therefore expect to earn significantly higher annual average returns. In summary, starting to save for retirement early makes higher payoffs possible without having to accept a higher risk of loss.
Greater opportunities for returns at a young age
For Generation Y or Millennials (age 18 to 35) as well as for people established in their careers aged 35 to 45 with an investment horizon of more than 20 years, ongoing retirement savings should be invested 75% in diversified equities, 15% in CHF bonds and 10% in real estate. The model calculations show that the likelihood of incurring a nominal loss when holding these investments until age 65 is less than 5%.
For the baby boomer generation (age 45 to 56), saving for retirement is a matter of great urgency. It is possible to keep risks manageable (minimum 90% likelihood of not incurring a loss) and invest 46% of ongoing retirement savings in diversified equities, 44% in CHF bonds and 10% in real estate. For ages 57 to 65, right before retirement, the remaining investment horizon is too short to invest in equities, real estate and bonds while maintaining a manageable level of risk. In terms of risk, an interest-bearing pillar 3a account should therefore be the first choice. Those wanting to retain the option of earning higher returns should consider extending their investment horizon by not liquidating pillar 3a retirement savings at age 65, but instead transferring their investments to a private custody account and liquidating them at a later time. Particularly for assets set aside for later in retirement, this strategy (earliest liquidation at age 75) enables savers to invest as follows: 25% in diversified equities, 65% in CHF bonds and 10% in real estate.
The complete study is available on the UBS website under the following link: www.ubs.com/vorsorgeforum
UBS Switzerland AG
Veronica Weisser, economist and pension expert
Head UBS CIO WM Swiss Macro and Sectors
Tel. +41 44 234 50 62
Daniel Kalt, Chief Economist Switzerland
Head UBS CIO WM Swiss Investment Office
Tel. +41 44 234 25 60
Managing Director gfs-zürich, Market & Social Research
Tel. +41 44 360 40 20