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Negative interest rate environment increases pressure on Swiss pension system

Zurich / Basel Media Releases Switzerland

Since the Swiss National Bank (SNB) scrapped the EURCHF floor on January 15, 2015 and lowered the negative interest rate even further, the interest rate environment in Switzerland has been turned on its head. The UBS Chief Economist Switzerland and his team analyzed the possible implications under different interest rate scenarios. The results show adverse effects for the real economy, significant interest rate risks and additional consolidation pressure in the banking sector, along with serious consequences for the Swiss pension system.

Zurich/Basel, 6 March 2015 – In abandoning the Swiss franc's exchange rate floor with the euro, the SNB also reduced its target for the 3-month LIBOR by another 50 basis points to –0.75%. Immediately following this move, nearly the entire yield curve for Swiss government bonds up to a maturity of 16 years fell sharply into negative territory. The effect of the franc's appreciation on prices and the economy are complex and almost unprecedented.

"Up to now, the focus has been on the consequences of ending the exchange rate floor. The resulting impacts for the export industry and tourism are enormous," said Lukas Gähwiler, Head UBS Switzerland, "but we have to keep in mind that the impact of the negative interest rate environment is long term. It is at least as serious for the economy as ending the floor to the euro, and could even be more serious."

In a new report, UBS economists used a comprehensive econometric macro model to examine the implications of various scenarios for the Swiss economic outlook in the years ahead. They show what the impact could be on the basis of three future interest-rate scenarios. The focus is on the macroeconomic consequences and the effects on the financial sector and Swiss pension system.

Long period of low interest rates and rising unemployment
The analysis of three different global economic scenarios suggests that interest rates will remain very low and in some cases will go significantly deeper into negative territory, while real GDP growth is set to fall sharply below its potential rate of 1.5%. Even in a middle scenario, the UBS economists see short- and medium-term interest rates in Switzerland remaining negative into 2017. Low interest rates make labor more expensive relative to capital and, together with a strong Swiss franc, lead to a rise in unemployment, especially among the lower-qualified section of the workforce.

Banking sector interest rate risks of billions of francs
For the banking sector as a whole, direct costs arising from the negative interest rates on sight deposits with the SNB are likely to be up to CHF 1 billion. If banks across the board are forced to pass on negative interest rates to their deposit customers, this could lead to a significant increase in the holding of cash. In addition, UBS economists estimate that the indirect risks arising from the negative interest rate environment are high. The extremely low interest rates lead to an erosion of interest rate margins, one of the main sources of income for many banks, and they increase the risk of significant losses in the event of a future steep rise in interest rates. Should an interest rate shock occur on a similar scale to that at the end of the 1980s, Swiss banks could lose more than CHF 30 billion in accumulated interest income over the next 10 years, according to the UBS report. In addition, insurance companies could become more active in the mortgage market as they search for returns. Overall, the negative interest rate environment, combined with the existing regulatory pressure, is likely to speed up the pace of consolidation in the banking sector.

Many pension funds face shortfalls
If interest rates were to stay negative, many pension funds would see their shortfalls grow even larger, also because pillar 2 investment guidelines restrict the ability of pension funds to invest in assets with higher potential returns. If interest rates were to stay low or even negative for longer, pension funds could be allowed by law to increase employee contributions in order to finance the promised pension benefits. This would lead to a greater redistribution between people in employment and pensioners, as well as placing an additional burden on companies in the form of higher personnel costs. In these circumstances, a measured reduction in the statutory conversion rate seems more urgent than ever. For pillar 1, lower interest rates would mean a sharp increase in the AHV financing shortfall, which stood at CHF 1,000 billion even before the onset of negative interest rates. In a scenario of low interest rates and weak equity markets, the AHV compensation fund could be exhausted as early as 2024, according to the UBS economists' calculations. By contrast, in a scenario of higher interest rates and positive equity market performance, the AHV compensation fund would be sufficient to fund excess pillar 1 expenditure until 2028.

The complete study (in German) is available on the UBS website under the followin link:




Dr. Daniel Kalt
Chief Economist Switzerland & Regional CIO Switzerland
UBS Chief Investment Office Wealth Management
Tel. +41-44-234 25 60

Dr. Veronica Weisser
Economist and pensions expert / Head CIO WM Swiss Macro and Sectors
UBS Chief Investment Office Wealth Management
Tel. +41-44-234 50 62

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