Swiss could benefit from Dutch pension model

Voters told the government to leave the occupational pension alone Keystone

Switzerland should look towards the Netherlands if it wants to improve the efficiency of its occupational pension system, a pensions expert tells

This content was published on March 10, 2010

Giuliano Bonoli, from the Swiss Graduate School of Public Administration in Lausanne, was reacting to a nationwide vote at the weekend in which voters overwhelmingly rejected a government plan that would have effectively reduced benefits.

Bonoli points out that the Dutch have much fewer schemes than the Swiss; by reaching critical mass they are able to reduce their costs as a result.

The Swiss government plan, backed by parliament and the business community, was turned down by 72.7 per cent of the electorate. It was intended to ease the financial strain on the scheme against a background of an ageing population and lower than anticipated returns on savings capital.

Bonoli explains that the Swiss might accept change at the ballot box if a more equitable solution were proposed.

Switzerland’s occupational pension scheme, known as the second pillar, is part of a three-tier system that includes the old age pension and individual savings plans. Was the post-vote jubilation by those who rejected the government’s proposal justified because the problem of financing will not go away?

Giuliano Bonoli: Of course a “no” vote doesn’t mean there won’t be problems in financing current and future entitlements in second-pillar pensions but I think in one way the jubilation is justified. When it comes to solving this problem there are many different ways.

Those who opposed the [government] proposal indicated very clearly that a solution to this problem that is based solely in reductions in benefits is very unlikely to obtain a majority in Switzerland. Most likely the government will have to look into other types of solutions. How does Switzerland compare with other countries on the issue of occupational insurance schemes?

G.B.: Switzerland is often considered by international agencies such as the OECD [Organization for Economic Co-operation and Development] or the World Bank as an example of good pension policy and I think the Swiss occupational pension system is pretty good in international comparison. It has a very good rate of coverage – nearly all employees are covered and it guarantees a decent income in retirement.

Perhaps if we look elsewhere, one interesting case is the Netherlands, which has a system which is much more concentrated than the Swiss. There are fewer schemes. In figures, they run into tens whereas in Switzerland we have a couple of thousand. These Dutch schemes are very large. They cover whole sectors on industry and they have a bigger critical mass so they can reduce administrative costs for each individual participant by quite a lot… It would be a good development for the Swiss system to move closer to the Dutch variant. If the problem isn’t going to disappear in Switzerland, what has to happen?

G.B.: The easiest way affects two key parameters - one is [to cut] benefits and that was tried last Sunday - and the other is [to increase] contributions, and maybe a more balanced combination of the two might be more acceptable to Swiss voters. I think ideally we should put in place a system where virtually all the [pension] funds are able to offer the best conditions to all.

One of the problems that Swiss pension funds have is that many are small, and private insurance also provides pension coverage for small and medium-sized companies.

I think these providers of occupational pensions don’t have the critical mass to match what can be done in larger company-based pension schemes or in the branch-based pension schemes. We should push towards mergers and more branch-based pension schemes that will be able to offer better conditions. How pressing is the need for reform of the scheme?

G.B.: It’s not so pressing because these pension funds have huge amounts of cash and assets that they’ve accumulated over the years. A few more years with a system that’s not fully financed doesn’t sound to me like something really dramatic.

On the other hand I think we should not stop thinking and working towards a new system because in pension policy you need time if you change the rules to allow people to adapt their behaviour, for example to save more, to decide to work longer and so on. Do you think that voters will adapt, change their minds and vote for lower pensions?

G.B.: I think what is important is to put in place a system that voters can trust and where voters perceive that sacrifices are shared in an equitable way; this was not the case last Sunday.

I think a more balanced compromise would be for example some moderate reduction in pensions accompanied by increases in contributions or some other concessions. I think we need a system where trust in those that are running it is strong enough that voters can accept a temporary reduction [in pensions], for example, knowing that if things go better than expected [in the economy], they will get it back. What have the authorities got to do now on this issue?

G.B.: I think the vote should really remind them it is very unlikely that voters will accept simple cuts and next time they have to prepare a more balanced proposal where there is [also] something for the trade unions, for the left, for insured people, so that the chances of it being accepted are better.

Robert Brookes,

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Occupational pension scheme

This operates on the basis of funding. The capital is converted into the annual annuity using the so-called conversion rate.

This was reduced from 7.2% to 6.8% under the revision of the Pension Funds Act, making the annuity SFr6,800 ($6,306) for every SFr100,000 in capital.

Before a transitional period had ended, the government and parliament wanted a further reduction of the conversion rate to 6.4%.

The House of Representatives supported the proposal by 126 votes to 62, while the Senate vote was 35 votes to one.

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Swiss pension schemes

The old-age pension system consists of three levels (pillars). The first is the state pension plan. Every resident must pay contributions to a federal insurance scheme, which pays out a pension on retirement to cover basic needs.

The second pillar involves an occupational pension. This is an obligatory insurance to which employers and employees contribute equally. The money accumulated is paid out in the form of a pension or capital.

The third pillar is an individual pension. It is voluntary and contributions can be deducted from tax.

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