In May, in addition to its annual activity report, the OAK BV presented the latest figures on the financial situation of Swiss pension funds. This comes ten years after the BVG structural reform came into force and its own foundation was established.
The financial situation of Swiss pension funds improved in 2021, thanks to a very good investment year. They achieved an average net return on assets of 8.0% (previous year: 4.4%). The reported funding ratios reached a new high of 118.5% on average at the end of 2021 (compared with 113.5% at the end of 2020), as reported by OAK BV. In cooperation with the regional supervisory authorities and the professional associations of the second pillar, it ensures increased transparency and quality assurance in occupational pension provisions.
Interest on pension capital was high
For 2021, actively insured persons received a significantly higher interest rate on their pension capital than in the previous year (1.84%), averaging 3.69% for pension funds without a state guarantee and full insurance coverage solution, and 3.08% (previous year: 2.10%) for pension funds with guarantees. In the year under review, the mandatory BVG retirement assets were subject to an interest rate of at least 1.00% (previous year: 1.00%). Due to the higher returns on the assets, there was practically no redistribution from active insured persons to pension recipients in 2021.
Redistribution was lower
The estimated value of the redistribution for 2021 is 0.2 billion Swiss francs (previous year: 4.4 billion Swiss francs). The OAK BV expects annual redistribution to remain lower than the current five-year average of 4.7 billion francs. However, according to OAK BV estimates, a total of CHF 45.3 billion was actually redistributed from active insured persons to pension recipients from 2014 to 2021 alone. In view of the fact, that redistribution had already reached a considerable level before 2014, OAK BV finds these figures all the more significant. The solidarity mechanisms of the BVG system had thus been strained unilaterally. The top bodies of the foundations are therefore called upon to ensure a balance between the differently treated vintages in the event of future surpluses.
Negative developments on the horizon for 2022
After the funding situation of the pension institutions was very positive on average at the end of 2021, and 51% (previous year: 30%) of the pension funds had already fully built up their fluctuation reserves for turbulence on the financial markets, negative developments have been emerging since the beginning of 2022. On the one hand, inflation is now so severe that further interest rate hikes are to be expected this year. On the other hand, the war in Ukraine and the sanctions against Russia are likely to increase inflation and have a negative impact on economic development. According to projections based on the individual investment strategies of the pension funds, and the effective development of the investment markets, the average funding ratio of the pension funds without a state guarantee and full insurance coverage solution fell from 118.5% at the end of 2021 to 112.9% at the end of March 2022.
Adjustments to the legal requirements for the mandatory pension scheme are still lacking
Ten years after the BVG structural reform and its own establishment, OAK BV draws a positive balance. At the financial level, the pension funds have become more robust overall. The mostly positive net returns had caused the coverage ratios of the pension funds to rise. During this period, the pension funds had made adjustments in all areas to take account of increased life expectancy and low interest rates. However, the OAK BV criticizes that there is still a lack of corresponding adjustments to the legal requirements for the mandatory part of occupational pension provision.
Concentration process among pension funds continues
Between 2014 and 2021, the number of pension funds has decreased from around 2,000 to 1,500, while total assets have increased from around 800 to around 1,200 billion Swiss francs. This concentration process has led to the growth of collective and joint schemes. Although they account for only 18% of pension funds, 72% of active insured persons are insured by them. These institutions pose significant governance and financial stability challenges for their governing bodies. Many of these institutions are also comparable in size and complexity to large insurance companies, which are much more strictly regulated.
OAK BV's supervisory instruments are limited
OAK BV complains that the law has not yet taken this changed pension landscape into account. The BVG is fundamentally based on the model of the company pension fund. The supervisory instruments are clearly limited in comparison to banking and insurance supervision, but also to the supervision of social health insurers. In addition, the decentralized supervision system with regional authorities, makes the necessary further development of supervision within the framework of existing legislation difficult. OAK BV's room for maneuver is limited, both vis-à-vis the regional supervisory authorities as well as the pension funds. It can therefore only partially fulfill the objective formulated in the message on structural reform, according to which it should ensure that the occupational benefits system as a whole functions safely and reliably.
The OAK BV is also dissatisfied with the backlog of reforms to the BVG system. This has led to the fact, that adjustments in the supervision of occupational pensions have also not been tackled. It is now time make the necessary adjustments in the area of supervision.