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UBS analysis Negative interest rates threaten Swiss pensions

The Swiss National Bank's negative interest rates could have serious consequences for old-age pensions


The Swiss National Bank’s removal of the minimum exchange rate of CHF1.20 to the euro in January and institution of negative interest rates could have grave consequences for Swiss pensions, say economists from the largest Swiss bank, UBS.

The UBS economists analysed the potential effects of a variety of interest rate scenarios. The results show burdens on the real economy, significant interest rate risks, additional pressures on banks to consolidate, and a serious impact on pension funds, UBS announced at a press conference on Friday.

“It is at least as serious for the economy as ending the floor to the euro, and could even be more serious," said Lukas Gähwiler, head of UBS Switzerland, in reference to the long-term impact of the negative interest rate environment.

With its discontinuation of the franc-euro exchange rate cap, the SNB cut its target three-month Libor interest rate by an additional 50 basis points, to 0.75%. Immediately afterwards, the entire yield curve for Swiss government bonds with terms of up to 16 years fell into the negative, the analysts found.

The effects of the increase in value of the Swiss franc and of negative interest rates are complex and have no relevant precedent, said UBS.

Consequences for social insurance

One potential area that could be hard are pension funds, including both government and vocational pensions, the study found.

Guidelines for vocational pension funds already limit the amount that can be invested in assets with high returns. If the Swiss National Bank continues to offer negative interest rates, many pension funds would become increasingly underfunded, and an increase in individual contributions may be necessary in order to finance payments to retirees.

Financing of government pensions could also become a problem. Lower interest rates will increase the gap in government financing of old-age pensions – already more than CHF1,000 billion ($1,024 billion) before the SNB’s introduction of the negative interest rates. In a scenario with low interest rates and a weak stock market, the money in the pension compensation fund could be depleted by the year 2024, the UBS analysts calculated. In a situation with higher interest rates and positive equity market performance, the compensation fund would be sufficient to fund excess expenditures until 2028.

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