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UBS Pension Forum – Analysis of the Pension Reform 2020 proposal and UBS Retirement Index Switzerland

Zurich Media Releases Switzerland

The final results of the analysis of the proposed Pension Reform 2020 show that the reform would improve long-term pension funding and make the system more sustainable. Given the large size of implicit funding gaps, it is, however, only a small step that comes at the cost of worsening intergenerational equity. The UBS Retirement Index, which measures the pulse of the Swiss pension system, shows continued weakening in the last quarter of 2016 and the first of 2017.

Zurich, 23 Mai 2017 – The demographic aging process can be expected to make a sizable dent in the funding of Pillar 1 of the Swiss retirement provision system. This is due to the AHV's limited reserves resulting in uncovered pension benefits of some CHF 1,000 billion, which represents an implicit shortfall of 173.4 percent of Switzerland's gross domestic product (GDP). If the proposals put before the electorate in Pension Reform 2020 were to be put into effect, the AHV's funding gap would be reduced by about a fifth to 135.1 percent of GDP. The 0.6 percentage point increase in VAT would do the most to secure AHV funding, by reducing the shortfall by 28 percent of GDP. Bringing the pension ages of men and women in line and increasing the AHV contribution rate would similarly contribute 15.6 and 15.4 percent of GDP respectively towards bridging the funding gap. However, the pensions package also contains measures – a more flexible retirement date and a higher ceiling for couples, for example – that would increase the funding gap. Raising monthly AHV pensions by CHF 70 is set to be a particular financial burden, widening the funding gap by 24.8 percent of GDP.

Pillar 1: Sustainability to the detriment of intergenerational fairness

There appears to be a lack of balance in requiring mainly the younger generations to bear the burden of this reform, since it is they who, over the course of their working lives, will be paying higher taxes and social contributions. It is surprising that the age groups for whom retirement is imminent will, even on average, be significantly better off than they are under the law as it stands at present, in that they will immediately benefit from the CHF 70 increase in pensions for new pensioners, while being required to pay the higher taxes and social contributions for a shorter period than younger generations (see Fig. 1).

Fig. 1: Reform burden: age groups closer to AHV retirement come off better, while younger ones lose out

Pillar 2: Stabilizing effect of lower conversion rate limited by the protection of acquired rights

By reducing the obligatory minimum conversion rate, the proposal also makes Pillar 2 more financially stable. If the reform were to be implemented, the uncovered benefit obligations, and hence the financial gaps in the pension funds, for all age groups under consideration, would be reduced. The protection of acquired rights proposed as part of the reform would, however, have the effect of relieving men over the age of 45 of virtually any financing burden in the mandatory system. Given the protection of acquired rights and the still too high conversion rates, the reform will only be able to partially reduce the opaque subsidizing of Pillar 2 by the working population, which is to the detriment of their own future pensions.

Swiss pension provision momentum still negative

In the fourth quarter of 2016 and the first of 2017, the UBS Retirement Index Switzerland – which is compiled quarterly – remained negative. The Index measures the Swiss pension system's state of health and stability (see Fig. 2). The deterioration can be attributed to three factors: First, demographic change became even more acute – compared with the same quarter last year, the number of workers who have reached retirement age is likely to exceed that of young people going to work for the first time. Second, a combination of the more sluggish growth in real estate prices and falling rents has put increasing pressure on the sub-index that tracks economic development. Third, the final Pension Reform 2020 proposal to be put before the voters turned out to be less ambitious that the drafts previously debated in Parliament. In contrast, the financial position of both Pillars 1 and 2 improved, largely as a consequence of rising share prices on the world's stock markets.

Fig. 2: UBS Pension Index Switzerland and contributions of the sub-indices

The complete UBS studies on the Swiss pension system can be downloaded at the following link:

UBS Switzerland AG


Veronica Weisser, economist and pension expert
Head UBS CIO WM Swiss Macro and Sectors
Tel. +41 44 234 50 62

Tobias Hochstrasser, economist
UBS CIO WM Swiss Macro and Sectors
Tel. +41 44 234 81 74

Daniel Kalt, Chief Economist Switzerland
Head UBS CIO WM Swiss Investment Office
Tel. +41 44 234 25 60