I’d guess 3-4%, but it would be good if someone has real data on this.
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I think it depends on expected life expectancy, age of the person and expected Investment returns (for different asset classes) at the moment of annuity discussion.
For example -: If expected life expectancy is 85 and someone retires at age of 65. Then minimum conversion rate would be 5% (assuming zero residual value) because this is basically assuming zero returns from capital markets. If provider doesn’t offer 5% then no one will buy annuity.
However if someone is seeking a perpetual annuity then the rates would be lower because institutions need to factor in the risk of extended life. I believe they have some models
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I have no knowledge of a way to access private annuity rates in Switzerland (I have also no knowledge that a true lifelong product past 65 y.o. is even sold by private insurances) and will be glad if someone can provide one (same for an example of such product).
Comparing with the UK and the US:
TLDR;
Non-vetted mega rough comparisons with the UK and the US seem to show that roughly 5% for couples (with survivorship benefits) and 5.5% for singles could be competitive private rates in similar conditions in Switzerland.
Personal assessment: 6% would still be too high but a little adjustment is better than no adjustment at all.
Source for UK annuity rates: Annuity Rates: View Best Annuity Rates from the UK Market
US annuity calculator: https://www.immediateannuities.com/
In the UK:
The best rate is apparently 7.165% for a 65 y.o. single. Swiss BVG pensions have survivorship benefits so it’s probably fairer to compare to the 6.493% of the joint life 50%.
The UK currently have a central bank rate of 5% and year on year (YOY) inflation of 2.2%.
The SNB has a 1.25% policy rate and has had YOY inflation of 1.1%.
Using the interest rate differential in a similar way than we’d use it for future currency exchanges expectations, and considering 80 years of life expectancy (for ease of calculation) that would put us toward expected mean of, for the UK:
- 4.94% expected mean nominal pension conversion rate for the joint life 50% in CHF
- 5.45% expected mean nominal pension conversion rate for a single 65 y.o. in CHF
In the US:
The best rate is apparently 7.62% for a 65 y.o. single male (7.296% for a female) or 6.66% for a pseudo equivalent to joint life 100%.
The US central bank rate is currently 5.25%.YOY US inflation is 3.2%.
With the same hypothesis than for the UK, that would put us on an expected mean of, for the US:
- 4.90% expected mean nominal pension conversion rate in CHF for a pseudo joint life 100%.
- 5.60% expected mean nominal pension conversion rate in CHF for a single male.
- 5.36% expected mean nominal pension conversion rate in CHF for a single female.
Note that male and female pensions should even out due to a higher life expectancy for women, which isn’t taken into account in this quick calculation (everybody dies at 80).
. /!\CAUTION/!\ .
I would caution that this is a very, very rough back of the envelope assessment, The hypotheses made for the calculation are almost criminally rough, I haven’t vet the numbers nor the hypotheses behind them (what actually is a joint life 50% annuity, same for the US, plus it seems to be State dependent for them, I’ve used “other” for that field) and it would be the cheapest annuity available, which might be subject to conditions. I doubt most people would get those rates as sellers are probably doing their job of selling more expensive products when they can. Also, taxes would have to be deducted at withdrawal as mentioned by Cortana.
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This might not necessarily be worse than paying income taxes each year on the pension. Depends on canton and possible splitting of withdrawal amount across tax years.
I think that would be too simplified a calculation. There are expected returns on the initial capital, risk pooling and profit expectations from the insurer to take into account too.
They probably use a statistical life expectancy (so lower than 95 years and closer to 85 years for 65 years old males and 88 years for 65 years old females). I would add their returns on investable assets, deduct their costs and margin and sprinkle miscellaneous upon it all to try to model it.
3.33% seems to be a lower floor at that particular point in time, then. If there’s a discretionary part depending on actual returns, that one could be pooled with all other risk takers to add to the guaranteed part in a mandatory scheme.
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If you die before you retire, do the funds stay within the PF? If so, that could be a source of additional capital (along with those who die relatively early) - of course reduced by widow/orphan pensions.
Yes. This is a good number of people choose lump sum because then the money is at least staying within the family and not in fund
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Stupid question maybe, but does the widow/orphan pension insurance stop when retiring? So no more insurance from then on?
For people choosing annuity, the widow pension would still be applicable after retiring. But the amount is less than what a retiree gets
Again depend on pension funds but most likely there are some general regulations around it
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Retraites Populaires, based in Lausanne, has an online calculator.
It is somewhat limited in the choices and options proposed, but it gives interesting values and trends, e.g.
- for a 65y old man wishing a pension immediately for life and with no survivor benefits, the conversion ratio is 5.23%
- the ratio is 4.54% when the contract includes survivor benefits (the heirs receive, after death of the contractant, the remainder of the money = the original deposit minus the sum of all pension paid)
- the ratio is 5.80% when the deposit is done at 65y old, but with pension starting only at 70y old and with survivor benefits.
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I’d go for 100%,
This guy managing the Tampa Firefighters’ & Police Officers’ Pension Fund has actually had a majority allocation in equity, but says 100% equity would’ve been better. The fund’s stock portfolio has achieved an annualized return of 14.4% over 50 years, top five ranked in the US. Pretty much a one-man show
Fees: 0.25% flat. Compare that to Swiss pension funds…
[00:51:31] William Green: One of the things that’s striking to me is how much better you would have done if you had no bonds at all. And I mean, massively better. And I’ve often wondered, I think this is partly because when I was kind of coming of age as a, as an investor in the late nineties and there were those studies on, was it Jeremy Siegel writing about stocks for the long term?
[00:51:52] William Green: And I just sort of internalized this idea, the bonds, it was sort of a lousy long term bet. And, and actually I was probably totally wrong in terms of, writing that massive wave of, of interest rates coming down. But there is a part of me that’s always been kind of deeply wary of putting too much money in bonds and when you look at it now, like, what is the case for owning bonds versus having a very hefty portion of one’s portfolio just in equities?
[00:52:21] Jay Bowen: You’re on it. You got it. That’s it. Nobody’s really, I’ve said for forever, municipal funds should not own bonds. They should not be in bonds. It’s just overwhelming, the data is so overwhelming."
I think the asset allocation is a lot dependent on expected withdrawal rate from the fund. 60-100% equities is quite high in my opinion. Most likely Norway withdrawal rate is low . I read somewhere like 2.5-3.0%.
Asset allocation decisions for pension funds are not so straightforward like defining a 3a asset allocation with zero withdrawals for next 20-30 years.
I believe the cap for equities need to go up but what’s the right number, it’s tough to say.
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Just no. A stock market crash like in 2008 would wipe out the retirement system.
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Nope, as Cederburg has shown, 100% global equity would have provided an optimal ride - of course, short-term pain, but long-term no issue
You‘re talking about one single fund out of thousands. Complete survivalship bias. Anyway, it‘s getting offtopic. This thread is more about the vote.
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As much as I like the Cederburg study, problem is that the future is uknown. With bonds you can liability match more reliably.
Just imagine an even worse situation than 2008 and you are in the middle of it. And you have thousands of retirees to pay out.
You don‘t know if it may go down even worse and you have to trust that the past will be like the future.
“This time is different” sentiment is really high in such situation and it may be one day even.
It‘s too risky.
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It looks like 65% are voting no. Further dooming the younger generations.
It actually makes me mad and questioning democracy as a whole. I was already under the impression that it‘s just a dictatorship of the uneducated, now it might also be a dictatorship of the old people.
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I don’t really understand what you mean. Isn’t everyone allowed to vote?
Yes as per news about projection (bluewin) the proposal has been rejected
That seems like a huge oversimplification. I voted no as well, simply because it was a bad reform. The compensation measures would have been extremely expensive and only resulted in less redistribution in ~30 years (see BVG-Reform und AHV: «Leider denkt jeder zuerst an sich selbst. Die Entscheidungsträger sind meist älter und stehen kurz vor der Rente» | cash for some rough calculations). Better the current status (with which some funds can live pretty well, as they have a lot of non-obligatory capital anyways) than a bad reform.
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