Parliament supports pension rate cut

Saving for the future may prove more difficult for the younger generation Keystone Archive

Parliament has approved a government decision to lower the minimum rate of return on company pensions from four per cent to 3.25 per cent.

The move has angered trade unions who fear it could reduce future claims by up to 25 per cent.

Following six hours of debate on Thursday, the House of Representatives followed last week’s lead by the Senate and voted in favour of reducing the guaranteed minimum which has been in force since 1985.

However, they criticised the government’s decision to change interest rates on pension funds, with one parliamentarian saying it was “heavy-handed” and “rash” and did nothing to improve public confidence in the pension system.

The House also called for more transparency from the insurance companies, who manage the pension funds.

One parliamentarian said more information and clarity of reporting was needed to help people better understand why the interest rate drop had been necessary.

The power to change the interest rate lies solely with the government. But there was a public outcry after the cabinet announced in July that it was planning to cut the rate from four to three per cent.

Opponents accused ministers of ceding to pressure from Switzerland’s powerful insurance companies.

Stung by the criticism, the government then agreed to adjust the rate to 3.25 per cent and allow both the Senate and the House of Representatives to debate the issue.

A final decision on the new interest rate level is expected later this year, with the new rate coming into force on January 1, 2003.

Adjusting the rate

Insurance companies, which have been badly hit by plummeting financial markets, have welcomed the proposed rate cut.

However, the Swiss Insurance Association, the umbrella organisation representing the country’s private insurance industry, said it wanted the government to stick to the three per cent level.

“Low interest rates on the capital markets over the past six years mean that pension funds are no longer able to earn sufficient returns on their risk-adjusted levels to guarantee the stipulated four per cent,” the association told swissinfo in a statement.

“The rate needs to be adjusted downwards.”

Critics of the cut claim that in the long term it will reduce company pensions for future claimants.

“The consequences are much greater the younger you are,” Colette Nova of the Swiss Federation of Trade Unions told swissinfo.

“If the minimum yield remains low for a number of years, it could cut the value of a company pension by between 15 and 25 per cent – and that is a lot of money.”

Flexibility or confusion

But the Swiss Insurance Association rejects the argument. It maintains that the rate could be increased swiftly when interest levels and stock prices begin to rise.

Insurance companies want to see a more flexible rate which they say will respond to the prevailing economic circumstances.

But trade unions contend that the push for greater flexibility will only lead to confusion among pension holders.

“If company pension schemes are subject to frequently changing rates,” says Nova.

“Individuals will just find it difficult or impossible to gain an overview of what their entitlements might be in 20 or 30 years’ time.”

Transparency

Thursday’s debate focused on many issues, but the main one was the lack of transparency in the management of pension funds.

Nova says parliament has signalled that now is an ideal time to review and avoid past mistakes that may have led to individual pension holders losing out on money to which they were entitled.

She claims insurance companies took advantage of a lack of surveillance by the government and kept profits for themselves and their shareholders instead of passing them on to pension holders.

“Insurance companies treated the money from the pension funds they had set up as their own,” she says. “They used it for whatever purposes they wished – within the law.

“There was a total lack of transparency and they just reimbursed pension holders what needed to be paid out.”

swissinfo, Jonathan Summerton

Key facts

The current minimum yield on company pensions is four per cent.
The guaranteed minimum has been in force since 1985
Swiss pension funds contain around €300 billion