The Federal Council has decided to increase the minimum interest rate for compulsory occupational pension plans (BVG/LPP) from 1.5% to 1.75% in the coming year. The reference base for the minimum interest rate is the yield on federal bonds and equity, bond and real estate trends. According to the Federal Social Insurance Office (BSV/OFAS), the increase in the minimum interest rate is effective immediately given the positive change in equities and real estate this and last year.
Equities and real estate investments on a positive trend
According to the Federal Social Insurance Office, equities investments have developed well. The Swiss Market Index (SMI) rose 14.9% in 2012 and 17.6% by September 2013. Real estate recorded a performance of 6.8% according to the Wüst and Partner Index for 2012. On the other hand, prices of fixed-rate bonds have fallen given the increase in yields on federal and other bonds. While rising interest rates are a positive factor for pension institutions in the long term, they have caused losses on existing bond portfolios.
Pension fund performance is satisfactory
The picture is positive on the whole. The Pictet BVG Index 93, which has a 25% equities and 75% bond content, rose by 5.9% last year and by 2.8% as at September 2013. Pension fund performance is therefore satisfactory.
According BSV/OFAS estimates, pension institutions realised an average performance of 6.7% last year and 4.3% by the end of August this year.
The increase takes the difficult environment into account
The minimum interest rate was set taking into account the fact that pension institutions cannot allocate all their returns on investment to interest on retirement savings capital. According to the BSV/OFAS, they have a legal obligation to constitute investment fluctuation reserves, set aside the necessary provisions and satisfy legal pension claims.
Investment fluctuation reserves are still not at their target levels and the legal conversion rate is too high. Any increase in interest must be reasonable with due regard for long-term stability.