Checking my 2 pillar statements, I realized that I was getting a low return. I checked the pension plan rules and I found a table showing what interest I should get at the end of the year based on the coverage ratio and the yearly results. For my fund in 2020, coverage ratio is above 125% and yearly result was just above 3%. From what I found, 125% coverage ratio is above the current average of 115%.
Based on that table I (and all the other employees) should have received 2.25% and instead I only got 1.5%.
I reached out to the pension plan and included the employee representatives to ask for clarification. The answer that I have received from the plan stated that the table that I found was the maximum and because of low expected returns in the future they have decided for 1.5%.
I dug deeper and it looks like lowering the annual rate is possible only if the fund is underfunded or at risk of underfunding. Which clearly isn’t. I’m waiting for an answer from the fund.
It looks to me that the employee representative signed whatever was suggested and that the fund is bending the rules to increase the coverage ratio.
Does somebody have any experience with this?
Any idea why the fund wants to keep an “higher than normal” coverage ratio? Maybe it’s because they lose less fees when somebody leaves/retires.
Is the employer also benefitting from having a high coverage ratio?
I don’t know if it’s going to be possible to make changes but maybe my research will make the employee representatives think before approving next time.
Maybe others are in a similar situation and I wanted to share.
Each pension plan has their own coverage ratio target. Find out what yours is. I’d say that 125% is already quite high.
Maybe you have a pension fund with lots of equities and that needs a high risk buffer? The employer doesn’t gain anything from a high coverage, but they minimize their risk of having to add extra money in case of underfunding.
Getting 1.5% is already better than the legal minimum of 1.0%.
I believe they can give you whichever interest they want, as long as they provide at least the minimum interest required by law on the mandatory part (currently 1% as @SwissDan said). The underfunding rule comes into play only if they want to go below 1% (see Art 65d of the LPP), but that’s clearly not your case.
Also on the extra-mandatory they are free to do what they want.
Concerning the coverage ratio consider that it also depends on the technical interest they use for their calculations, so it’s difficult to compare.
Thanks for your answers.
The allocation of the fund is 40% bonds, 30% equities, 20% RE, 10% other. I wouldn’t call it super aggressive.
I agree that getting more than the minimum is better but maybe there is room for improvement. And it looks like they are not following the internal rules that have been defined.
The choice of the interest is defined by a council that includes 50% of employee representatives. I’m trying to influence them to ask for what is defined in the internal rules and not less.
Technical interest is 2%.
The fund is quite recent, we moved there following an acquisition in 2019, at the end of 2019 there was just 1 person retired out of approximately 2200 people. I don’t expect it to be much more at the end of 2020 but I don’t have the information yet.
I don’t think that I will make too much noice in the future but to me it looks more like the employee representatives don’t know what they are doing. They are elected and the election is not always based on competencies…
Why do you say that a realistic number would be 1.3%-1.5%?
I mean, pension funds have been averaging well over 3% returns over the last 15 years. And that’s including the financial crisis of 2008 and the COVID-19 of last year. If the technical interest rate is your return expectation, it should be over 3%.
Because they need to pay you 6.8% a year on the mandatory part after you retire. That means they can’t give you 100% of their return on asset and then pay you 6.8% of that amount every year until you die.
Standard disclaimer of asset managers. But it doesn’t apply to asset classes. I mean, if you don’t study history, you will learn nothing.
Which brings me to your “realistic” returns (over what period?). Firstly, shares have historically returned more than 4.5% p.a. (closer to 7-8% in CHF over a long period, depending on market).
Your other asset class assumptions are also weird; I wonder where you found them?
And finally, I don’t understand the point in investing in an asset class if you predict 0% returns. Why bother?
Overall, there is a real tendency of pension funds in Switzerland to not invest enough in the best returning asset classes, and just an irrational fear of the stock market. If you ask people, the stock market is a casino!
Most people here did not have anything invested in the dotcom or GFC area (or nothing significant). I think people might have forgotten how a proper crash feels like (the covid crash was so short lived, if anything it might have made people overconfident).
Pension funds have obligations, they can’t wait a decade for a -40% to recover…
It sure applies, society changes, the relative returns of different asset classes does too. Ask wealthy russian investors of 1917 if their stocks and real estate have performed accordingly to historical averages all the way through the October revolution. Things happen that can shake asset classes as a whole, the rise of cryptos could generate a new asset class that could affect the returns of other classes, for example.
The federal government dictates the minimum interest rate for the portion of your pension fund benefits made up of compulsory contributions (pillar 2a).
The pension fund chooses what interest they want to pay on the portion of benefits made up of voluntary contributions (pillar 2b).
If you or your employer contributes more than the compulsory contribution, the interest rate paid used will be the average of the federal interest rate on pillar 2a assets, and the pension fund’s interest rate on voluntary assets. If you have significant voluntary benefits (for example, if your employer pays double the required contribution) and the interest rate on voluntary assets is very low (i.e. 0.01%), then the average interest rate on your total benefits will be much lower than the federal interest rate on your compulsory benefits.
Swiss Equities returned 4.6% in real returns from 1900-2020. That would be about 6.9% in nominal terms, and that’s for a geometric mean (page 55 of report)
US Equities returned 6.6% in real returns from 1900-2020. That would be about 9.7% in nomimal terms (page 14). Yes, substract 0.7% p.a. for the USD/CHF loss, so you get 9.0% in CHF.
Even Swiss Bonds didn’t return nothing. Real bond returns were 2.4% over the 121 years period.
Very clearly, equities are the best returning asset class.
I get that the future might not be the same as the past but my concern is that they are not really following the rules that they set for the fund. Giving less than what is defined in the fund regulation is an exception and it is being used as a rule.
Do you guys have in your fund rules target rates based on yearly returns and coverage ratio? do they follow them?
My provider follows the rules they set, but they also change those rules literally every year…so it doesn’t mean much.
They’ve just announced a new reduction of interest rates for 2021
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Standard disclaimer of asset managers. But it doesn’t apply to asset classes. I mean, if you don’t study history, you will learn nothing.
I just don’t do that.