Let me throw in another wrench: when calculating monthly outgoing cash flow needs, pension funds need to to be prepared for Yours Truly, who is not interested in a monthly pension but demands that his accumulated pillar II capital plus mandatory (and extra-mandatory) interest be paid out in full as calculated on paper with guaranteed zero drawdowns regardless of whether it’s March 2009 or March 2020 or today or when I retire or when I decide to stop working and have my (guaranteed) capital be moved in cash to a Freizügigkeitsstiftung.
Let it sink in: the pension fund needs to sell at the worst possible moment – equity markets just went down ~50% in the GFC or ~30% in the COVID crash – to still pay out my guaranteed full Kapitalbezug around that time …
How much “guaranteed” can it be? Even with the safe strategy that they run now, it could in the worst case get tight if market drops by 90% and everyone wants their lump sum, no?
Only a fraction of people retire each year. Those scenarii are why there’s regulation on how much reserve they need to have, what kind of investment they can do etc.
(And why they build up reserves some years instead of distributing the money if the fund doesn’t have enough reserves, even if the fund did well some years)
Yeah, that all makes sense, but even here, “guaranteed” is not a 100% guarantee. This is what I meant. Only way to get 100% guarantee would be to keep enough hard cash available for the full pension for every currently insured person. Even if they are 25 years and will need it in 40 years. And AFAIK, this is not the case, so it is not a 100% guarantee. Or am I getting that wrong?
I used to be mostly indifferent to having so many pension funds in Switzerland, leaning towards having fewer, since every single one adds overhead, needs the same backoffice staff doing the same backoffice stuff, needs an overpaid CEO, etc.
Having fewer of them simply eliminates the same work being done (and paid for) multiple times.
Having some competition between the players is what pushed me towards “yeah, probably not really that efficient but maybe mostly fine?” Even though admittedly, they probably all run the same calculations: what are the outgoing cash flow needs for the next 120 months in the future, what are return expectations over the next 20, 30, 50 years in the future for asset classes x, y, and z, etc.
I am not really sure where I stand on this now.
One thing though I can state for sure: the rules are probably too liberal for now. In my personal situation, I work for an asset allocation company. They chose a pension fund that allocates the company’s pension capital – exclusively, as far as I can tell – in funds managed by the company I work for.
WTF for several reasons …
Sure, my company doesn’t own the assets in my pension fund pot, but things will surely take a while to sort out if the company goes belly up and the funds the company manages assets for a bunch of different clients.
This should simply be forbidden, IMO, as the only one profiting is my company (i.e. the owners of this company).
Better yet: my company charges fees on assets they manage. Essentially, a fixed % portion of the money going into my pillar II (both by myself and by the company) gets siphoned into the company’s profit bottomline. Profiting the owners of this company.
If markets dropped 90% and if your lump sum Kapitalbezug isn’t that great, getting a guaranteed pension of that on-paper lump sum now having dropped 90% is probably still the option most people would choose? No?
Exactly? All those requirements around how much reserve to hold, accounting for deviations around those assumptions, etc, force the pension fund to reduce risk in their allocation and thus to reduce return in their allocation?
Nothing is ever 100% guaranteed, but the regulation is meant to ensure that this should never happen (=probability epsilon, and if that happens, I guess the state can probably step in to backstop a crisis, since the state can absorb losses with a longer time horizon).
(But then there’s the issue of when the regulation is too generous/unsustainable, and the law can’t change because people can’t agree or pass the referendum hurdle)
Pension funds also invest in other asset classes, i.e. real estate which is costly to manage
Pension Funds have got actual “customers” to interact with (pensioners and active workforce)
a pension fund is also an insurance against disability and death
they hire people in customer support, sales (yes, it’s a competitive market), comms, ICT
they run offices and pay rent
Pension fund money is managed in a Stiftung, not in an AG. Most Stiftungen are actually independet, except perhaps those managed by banks and insurances. This is however only a minor part.
I consider 46 bps to be a decent price for the service you get.
One would think the pension fund for state employees (Publica) is in good shape.
Interestingly, the Deckungsgrad (coverage ratio?) was 98.3% at the end of 2023. Additionally, the Umwandlungssatz (conversion rate) is 5.1%, even the state’s pension fund realises that 6.8% is not sustainable
They’d be making 3% on the whole pot and distributing 6% on a slice of it (going to their retired pensioneers). It’d be the death of them if they’d get a really heavy share of pensions to pay with regards to their total assets but they’d probably get reorganized if it came to that (which is one of those situations where people can see “their” 2nd pillar assets get cut down).
We should keep in mind that switch from defined benefits to defined contribution was already a big step. That helps pension funds to remain viable. Of course employees saw it as a punch but that model was not workable anymore.
Now the conversion rate is being reviewed / reduced. I think at some point we might get into a situation where only lump sum withdrawals might be allowed instead of annuity. If that were to happen, people can choose whatever asset allocation they want and bear the risk / benefits of their choices. This is already happening with 1E plans.
Let’s say 50% are pensioners and 50% workers. Assuming it is ‘fair’ and workers don’t subsidize pensioners, then I guess the pensioners earn 3% and ‘eat’ 3% capital. Whereas workers just earn 3%.
So if pensioners have 100, then they earn 3 and use 3 so have only 97.
Assuming workers only accumulated part of the pot, then maybe they have 33 and then earn 1 so at the end have 34.
In this scenario, assets of the PF would have decreased from 133 to 131, i.e. lost 1.5% (ignoring new contributions). Since the pensioners get 6% of their final pot, I guess the rate of erosion will increase as they earn only 3% of 97, but get paid 6% of 100.
I wondered whether early deaths might ‘help’, but I guess the budgeting is done on an actuarially neutral basis, so only unexpectedly decreasing lifespans would help (maybe we got this from covid).
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