Wealth management – a smart way to boost your occupational pension

Vincent Arnal, Senior Wealth Planner
Jihan Bicici, Financial Planning Advisor
Piguet Galland & Cie SA

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How can you boost your occupational pension savings?

There are many reasons why Switzerland’s “Pensions 2020” reform was rejected by the Swiss people when it was put to a referendum in September 2017. But one thing people can agree on is that the programme was overly ambitious. Our pension system is increasingly feeling the pressure of an ageing population, especially with a growing number of baby boomers reaching retirement age. The Swiss government needs to come up with a solution. So now, instead of bringing in one big package of reforms, it hopes to get several smaller measures through in separate votes.

One such measure is the “AVS 21” reform. The debate has only just got under way, but it looks set to be a lively one. The proposal seeks to shore up Switzerland’s social security system (also known as the “first pillar”) by bringing in just some of the measures put forward in the “Pensions 2020” reform. These include increasing the retirement age for women and raising the VAT rate. The Swiss people will vote on this reform in 2019.

For the moment, there is no concrete proposal on the agenda for the occupational pension system – Switzerland’s “second pillar”. However, one carryover from the failed reform package will probably be a reduction in the conversion rate, i.e. the rate at which your retirement savings are converted into a pension. The legal minimum for the conversion rate is currently 6.8%. Most of the large pension funds have called for it to be drastically reduced, but the Swiss people are unlikely to accept a drop below 6%.

 

What impact would a lower conversion rate have on your retirement pension?

The conversion rate is an important factor in determining how much you will receive in retirement benefits.

If you have an occupational pension, you need to find out what impact the reduction in the conversion rate will have on your retirement. If the conversion rate is lowered to 6%, for instance, this would reduce your annual pension by around 12%. So what can you do to make up for this shortfall?

It’s difficult to explain why two people with the same retirement savings might not get the same pension. Even before the September 2017 referendum, pension funds had started to reduce the conversion rate applied to members’ supplementary occupational pension coverage (i.e. the proportion of your salary exceeding CHF 84,600 per year). They can do that because, although the minimum rate that can be applied to the compulsory portion of your occupational pension savings is set by law, the same is not true of the supplementary portion. The rate on that part can sometimes be 5% or less.

So even if you’d rather opt for a pension, it’s still a good idea to choose a pension fund that offers the possibility of withdrawing some of your retirement savings as a lump sum. An unexpected event – such as a health problem, death, real-estate project, gift or inheritance – could require you to rethink your financial strategy, and a flexible pension fund can make that easier.

So how can you boost your occupational pension savings?

One solution is to get a better return on your assets. But that can be harder than you think. The population is ageing, interest rates are at rock bottom, and pension funds have to make sure they have enough assets to cover their liabilities. All of these factors have made it impossible for pension funds to deliver a return above 1%. Yet we’ve calculated that the return would need to be at least 1.75% to make up for a lower conversion rate of 6%.

Pension savings often account for a significant proportion of our clients’ wealth. So it’s essential to select an effective investment strategy in order to offset a reduction in the conversion rate.

We offer an array of tailor-made solutions that deliver attractive returns at low costs, all backed by a solid pension fund.

Each of our LPP investment strategies has generated a total annualised return of at least 3%, regardless of the risk profile.

With a conversion rate of 6.8% and a return of 1%

Mr X is an employee of his own company and opted for a standard occupational pension plan on his annual salary of CHF 150,000. After applying the coordination deduction of CHF 24,675, his pensionable salary is CHF 125,325.

With an average annual return of 1%, his retirement savings at 65 years of age would be CHF 740,919. And with a conversion rate of 6.8%, his annual pension would be CHF 48,342.

With a conversion rate of 6% and a return of 1.75%

Mr X is an employee of his own company and opted for a standard occupational pension plan on his annual salary of CHF 150,000. After applying the coordination deduction of CHF 24,675, his pensionable salary is CHF 125,325.

With an average annual return of 1.75%, his retirement savings at 65 years of age would be CHF 846,863. And with a conversion rate of 6.0%, his annual pension would be CHF 50,812.

Key terms

LPP: Loi sur la Prévoyance Professionnelle (the Swiss Federal Occupational Pensions Act)

Conversion rate: the rate used to convert your retirement savings into your annual retirement pension

Coordination deduction: the amount covered by Swiss social security (i.e. the first pillar, or “AVS”); it is deducted from your annual salary in order to determine your pensionable salary

 

Want to find out more? Contact our wealth advisory team.

 

 

 

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