The actuarial interest rate is the discount rate used to calculate a pension fund's actuarial capital, technical reserves and funded status. A pension fund's actuarial capital has to be calculated once a year in accordance with legal guidelines. Basically, pension funds can only disburse what they have earned. If the rate of return on a pension fund's income is below the actuarial interest rate, the pension fund will become underfunded in the long run.
The Chamber publishes a reference rate once a year
Up to now, pension boards have set the actuarial interest rate individually for their own pension plans. At its recent Extra-ordinary General Meeting, the Swiss Chamber of Pension Actuaries adopted "Guideline FRP 4" on actuarial interest rates, effective 1 January 2012. The Guideline sets an interest rate to be used as a reference by pension plans when they set their own actuarial rate.
Market performance is the basis
According to the Guideline, the Chamber is to publish a reference rate once a year to be used by pension funds for the following year. The reference rate is based on the BVG-Index 2005 Pictet BVG-25 plus and the return on 10-year Federal bonds, both as at 30 September, calculated according to the formula set out in the Guideline. The result is rounded down to the nearest 0.25%. The reference rate for 2010 is 4.25%.
Pension funds must observe the guideline reference rate
The reference rate may not be lower than the return on 10-year federal bonds nor higher than 4.5%. If a pension fund's actuarial rate is more than 0.25% over the reference rate, the pension actuary has to justify the variance. Failing such justification, the actuary has to propose measures to the pension board for eliminating the difference within seven years.