Pension scheme reforms are deadlocked, yet time is of the essence. Not only will further delays cause the OASI pay-as-you-go deficit to climb even higher, but the unintended redistribution effects on pension funds are also putting old-age pension schemes in an increasingly precarious position. Greater knowledge about pension planning among the general population and a stronger sense of solidarity could loosen the Gordian knot.
For years now, the people of Switzerland have cited pension planning as one of their top-most concerns. Since retirement is a topic of immediate concern to each and every individual, every generation is equally worried. The same probably cannot be said of any other matter and its immense importance inevitably leads to conflicts between personal and societal interests. Growing demand for sustainability is failing to make any inroads in the area of pension planning – every pension reform attempted in the past few years has tanked. A glance at the figures, though, shows that time is of the essence: The Swiss Old-Age and Survivors’ Insurance scheme’s (OASI) pay-as-you-go deficit will swell to over CHF 20 billion a year over the next 30 years. And according to the Swiss Occupational Pension Supervisory Commission, the unintended redistribution effects on Pillar 2 pension funds already reached CHF 7 billion in 2019.
Why is putting pension planning on sustainable footing in Switzerland so hard? According to KPMG’s discussions with experts from the realms of politics and science, the reasons for this are manifold. One factor at the heart of the matter is a fear of loss. This centers around the fact that, over time, people have developed a clear perception of their personal retirement savings, accept this perception as unchangeable and cling passionately to it. Letting go of this perception triggers an enormous sense of anxiety and even existential fear in some cases. Statements such as “I’ve spent my whole life paying into the system and this is my due” are ever-present and illustrate the issue quite clearly.
At the same time, however, reaching a compromise is also difficult at the political level. The most recent attempts to reform the system have focused mainly on increasing contributions. Suggestions such as reducing pensions or raising the age of retirement are considered taboo, which means that the parameters available for fine-tuning the system have already been exhausted. “We won’t be able to get our pension system under control with this lack of willingness to make any sacrifices,” says Erich Meier, Head of KPMG’s Pension Planning Competency Center, with conviction. Although the financial challenges surrounding Pillars 1 and 2 are immense, it still seems like some people might not have realized yet just how urgently we need a sustainable solution. Meier notes a certain degree of numbness: “Ever since the 2007 financial crisis, we’re finding ourselves confronted almost daily with financial interventions of previously unheard-of proportions coming from either federal governments or their national banks. This trend has intensified even further during the current coronavirus crisis.” One thing is clear, namely that the pension system will require a substantial influx of funds in the long term and that these costs will dwarf the expenditures currently being made to overcome the coronavirus crisis.
Increasing the population’s knowledge about pension planning could help steer the pension system toward a sustainable development. Here, it is up to the education system, employers, the media and, above all, the pension institutions themselves. “Knowledge about pension planning is indispensable, particularly in a direct democracy,” explains Meier. What’s needed is a realistic examination of the situation for all age groups that is entirely detached from individual sensitivities. Before that can happen, though, there has to be transparency. We lack official long-term forecasts, for instance, that can be used as a basis for more thorough discussions about sustainable solutions. According to the expert, “in the long term, the right path definitely isn’t one with increasingly long retirement periods and a progressively unfavorable age structure – pension planning has to be structured in a way that is feasible across multiple generations.”
In any case, recent years have seen the topic of sustainability increasingly take center stage. As one of the leading auditors of pension funds in Switzerland, KPMG has spoken to numerous institutions about sustainable investing and determined that the market is indeed changing, but that smaller pension funds are still at a disadvantage since they lack the market power needed to demand suitable products at competitive prices. One important aspect is that the impact of the sustainability strategy must be reviewed on an ongoing basis and communicated to stakeholders who have clear expectations on the matter. Although smaller pension funds barely have the resources needed to comprehensively address the topic of sustainability, KPMG sees a clear trend that is being accelerated by the increasingly common use of digital tools. “Despite all the euphoria surrounding sustainability investments, we shouldn’t forget that it’s only one aspect of the calls for pension funds to take a sustainable approach. The primary objective of a pension fund is and will always be the sustainable fulfillment of pension obligations,” says Meier.