One for pensioners mandatory part (legal conversion rate)
One for pensioners extra mandatory part (lower conversion rate)
Ideally pensioners pot should be enough for pensioners if math works out. With 3% return, a pot of 100K should last for more than 20 years with 6K annual withdrawal. Of course sequence of returns matter
However when math doesn’t work, PF credit lower interest to workers pot vs. the real returns. For example lot of funds only offer 1.25%. Or in worst cases employers need to make additional payments.
Other points to note -: not everyone opts for annuity because it also has some disadvantages. So number of pensioners can go down.
Or, like in my country, slash pensions by 50% and add 3-4 years to the pensionable age
Pensions are a great system of forced saving, pity is they were instituted when most of the population was below 50, people had many kids, worked to 65 and were expected to go dead parrot by 66. (Again hyperbole)
And that sounds like a great idea.
Edit not to spam: the three pillar system is wonderful, like many things in this country.
And that’s why it’s not always best to have nationalized pension schemes.
I know there are some cons in Swiss pension systems but we have to agree that AHV + 2a + 3a is a good system and provides enough accountability on three teams
In an idealized model, pensioneers should have worked for roughly 40 years and their life expectancy in retirement would be roughly 20 years → they should be able to withdraw more than 3%.
6% might be a tad high (or not, I haven’t run a simulation) but it would definitely not be 3% either.
Edit: said differently, your hypothesis of 50% retired and 50% contributing is very unfavourable. It may happen in some pension funds (and some may have even worse) but that’s a factor of too many too little pension funds rather than age or contributions of the global population and could be addressed via other measures (like solidarity between funds but that may not be popular here).
The 5.1 bn cost was just for asset management. Total cost is 6.8 bn (see post from ternes11).
All the costs you mentioned are outside of asset management (ex the real-estate one).
Maybe there is a rationale to reduce the number of pension funds after all. I am more a liberal type, but I can easily see only a handful of pension funds exist long-term and free choice of employees to pick one of those (sort of like the health insurance system).
I have seen a comment about the US pension system. AFAIU, they used to have the same three pillars as CH: social security, employer’s pension, own savings (Roth and whatnot). With time the second pillar got eliminated in favor of own savings. AFAIU, second pillar was managed as a part of company’s liability, not outsourced to other funds. So if a company got bankrupt, the pensions are gone. Well, probably my understanding overly simplified.
I find the comparison of pensions with the health insurance very justified: both obligatory, both have important social implications. Without wanting to provoke a political discussion, I see no point in both being managed by private for profit companies.
The incentives are not that bad in the case of pension funds (different from health insurance).
The company (and the employees which also have a say) will want to choose something that will be able to pay the obligations. If there is not enough money, they (the company, the pension fund bodies, the employees) will have to pay the difference. Alternatively they go bankrupt (company, bodies) or need to change jobs (employees).
The upside is less well incentivized. A good pension fund is a difficult to understand bonus to employment. The high risk (and lacking compensation for the bearers of the risk) in case of failure disincentivizes high returns.
I‘d see that as a failure. Fine for many, but why force everyone into becoming their own asset manager/ financial planner - not everyone has the talent and emotional ability required. It also forces you individually to take on the „risk“ of a long live - instead of that risk being owned by the pension fund that can spread it across thousands of pensioners.
Differently put: employers didn’t want to underwrite the risk that they have to pay up anymore so lobbied with politics to have the risk transferred to the employees.
I would put it differently. Defined benefit discriminates late career progressions and career changes as increases in salary become extremely expensive for an Employer to fund the respective Pension fund. We want to be in a meritocracy but not in a system where people (randomly) make their career in their first 5 years and then are stuck where they are.
There are different perspectives to look into this.
Today when everything is mixed together, one can argue that no one is benefited. Reason being in order to ensure regulated withdrawal rate, the investment strategies are more conservative and in addition the full return from investments is NOT credited to contributing members. This results in lower capital at time of retirement.
If pension funds didn’t have obligations to provide regulated conversion rate annuity , they can be allowed to be more flexible in their investment strategy.
I don’t know what is the best. But I feel this is where we are heading towards.
Note -: having a lump sum doesn’t mean one cannot have an annuity. In that case there are multiple companies selling annuity offers. It’s just that rates are lower than BVG because private annuities don’t have liberty to take money from someone else (I.e contributing members)
Do you have any idea, or data, if when given the choice more people go for annuity vs lump sum?
I’d hazard a guess that more financially literate people would go for lump sum. Or people with higher risk tolerance. I don’t know what I’d do, leaning towards the idea of lump sum now but maybe that changes when I’m older.
Actually in my company, I have heard that conventional wisdom is to have atleast 50% taken as lump sum. But in lot of cases people withdraw even more.
It obviously depend on individual circumstances and fund conditions but I think for annuity, the benefits for dependent are reduced. So people prefer lump sum as in that case all money is available for the family
I don’t have data for Switzerland but I am sure someone on this forum will have it for sure
I will teach you how to stack the odds in your favor. The coefficient to convert the pension savings to pension is the same for men and women and is somehow connected to life expectancy of everyone, but men live shorter than women. So,
if you are a man, especially with unhealthy life style, prefer the lump sum payout;
if you are a woman, especially with healthy habits, beef up your pension savings and convert it to pension.
This would also correspond to typical risk profiles.
I think it’s even worse: you don’t take on that risk solely individually, you spread the risk of personally going broke across society as a whole since social benefits will take care of you in the worst case.
Social benefits are funded by taxes everyone else pays.
I’m curious to hear what you’re thinking about the upcoming BVG reform?
To me it doesn’t sound like it’ll benefit majority of future retirees. The withdrawal rate is lowered and contributions are increased
If yes, then I would see it as a bank account where you (and your employer ) add money every year and grows with small interest.
At the time of retirement , you will have a pot of money and no one can take it from you. Conversion rate might change but the total sum of money will always be there.
If you don’t like conversion rates at time of retirement , you can always choose to withdraw lumpsum and pay lumpsum withdrawals tax.
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