UBS Pension Index: The Swiss pension system remains under pressure
In the second and third quarters, the Swiss pension system trended negatively, as indicated by the UBS Pension Index Switzerland, which presents the current state of the Swiss pension system. A slowing real estate market and a rapidly aging population are keeping the index in negative territory.
Zurich, 21 December 2016 – The UBS Pension Index Switzerland stayed negative in the second and third quarters, indicating a further deterioration in the health of the Swiss pension system. There are two trends driving this development. First, the demographic shift has accelerated. Compared to last year, net migration to Switzerland in the third quarter is likely to have fallen, while there were more working people who reached retirement age than there were young people entering the labor market. Second, the subdued growth in real estate prices is putting increasing pressure on the sub-index that tracks economic development.
At the same time, pension funds have been able to generate positive investment returns, which are boosting the finance sub-index. The positive performance could be short-lived, however, as the improvement is based primarily on capital gains on first-class bonds due to the ongoing decline in yields following the Brexit vote. Such gains can be repeated only in a strongly deflationary scenario with falling yields.
Fig. 1: UBS Pension Index Switzerland and contributions of the sub-indices
Pension Reform 2020 challenges elected representatives
The Swiss pension system is currently fully able to pay all retirement benefits. This may not be true in the future, however. Thanks to voters’ rejection of the AHVplus initiative on September 25, 2016, an additional burden on the pension system was avoided. But far-reaching reforms are needed. Elected representatives are currently working on the draft plan for Pension Reform 2020, which will be voted on in September 2017 at the earliest. It would be worrying if the reforms were postponed yet again, as the AHV has an implicit financing gap of approximately CHF 1,000 billion, which is more than 170% of Swiss gross domestic product. In addition, pension funds are increasingly running into financial trouble because the conversion rates are too high due to rising life expectancy.
Calculation of the UBS Retirement Index Switzerland
The quarterly UBS Pension Index Switzerland presents the current state of the Swiss pension system. The index includes the most important factors for the stability of the pension system in four sub-indices: economic growth, demographics, finance and reforms. A negative value of the UBS Pension Fund Index Switzerland means that the index has deteriorated compared to the prior-year quarter, while a positive value represents an improvement. This stands in relation to the development of the series in the reference period of the first quarter of 2005 to the second quarter of 2016 (for the standardization used).
The complete UBS studies on the Swiss pension system are available under the following link: www.ubs.com/vorsorgeforum
UBS Switzerland AG
Tobias Hochstrasser, economist
UBS CIO WM Swiss Macro and Sectors
Tel. +41 44 234 81 74
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