2nd pillar scam?

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%.

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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.

Its always a good idea to leave a lasting impression both with top management and HR. At the Moment, it makes sense that companies aim for relatively high coverage ratios; particularely if they operate with a high technical interest. 125% can be high but should they operate at e.g. 2% technical interest; the „real“ coverage ratio probably was still a tad low. If they distributed too much; not only the corporate but potentiall even the representatives could end up with liabilities…

If I were you, I would not cause that much fuzz. Most employee representatives very well know what they are doing… and just out of curiosity; what technical interest do they apply and ehats the funds active vs. retiree quota?

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Thanks TeaCup,

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…

Your pension funds‘ technical interest rate is a tad high. At the Moment, a realistic number would probably be at about 1.3 to max 1.5%.

If they lowered their technical interest by about 0.5%; they would lose about 5% of coverage reserve.

So in reality, your pension funds genuine coverage ratio is in the range of probably 118%. Considering both Interest Rates, and current Shares Momentum and RE Prices; a 120% Coverage Ratio may indeedbe appropriate given how your pension fund invests.

Conclusion: I think that the pension fund actually came down with a wise decision here. The factual situation is definitely with them.

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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.

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Well… past performance is no indicator for future performance. But let us have a look at realistic returns:

  • 30% Shares at 4.5% expected return p.a.
  • 20% Swiss Real Estate at 2.5% Expected Return
  • 30% Bonds at 0% Expected Return
  • 10% Mortgages at 0.8% Expected Return
  • 2% Convertibles at 2.5% Expected Return
  • 4% CatBonds/ILS at 1% Expected Return
  • 2 % Commodities at 0% Expected Return
  • 2% Gold at 1% Expected Return
    => 2.04% Expected Return

We then reduce this by about 0.1% of Administration Cost… and we end up with 1.9% Gross Return. And this for a rather aggressive Pension Fund Portfolio. As soon as we have a certain number of pensioneers; we realise that they cant sustain 30% of shares and the expected return further reduces. About 1.3 to 1.5% technical interest fairly realistic.

:laughing: 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…

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That depends on the ratio of workers to pensioners. If you have no pensioners in the next 10 years, that’s perfectly fine.

Most people are not happy leaving a job with less pension than they entered.

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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.

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It’s more like around 5-6% in CHF, if you take a “long period” and include exchange rate changes.

Which makes 4.5% look a tad pessimistic, but still simply a good safe value.

The way it works is like this:

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.

There’s no arguing that special cases will always show different results.

But for those that want to get a read on long-term returns, Credit Suisse publishes a yearly report (for 2021, it’s here: www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/credit-suisse-global-investment-returns-yearbook-2021-summary-edition.pdf )

In it, you can see that:

  • 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.

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Long term returns are not a good proxy for the returns we can expect in the next 10 years. At the Moment, Bond Returns are at Zero to Negative and unless anything changes with the interest rates (which I doubt willin the next 10 years); Bond returns will materially Fall short of historic Bond returns. Same with Shares and Real Estate…

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It’s difficult to make predictions especially about the future :wink: I just don’t do that.

Everyone can have their opinion; I think we just need to come back in 10 years and we’ll see what the returns were.

Chill out and have a laugh with The Big Lebowski - That’s just like your opinion man

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