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Thursday, July 26, 2018
Swiss government warns of fire sale to fund first pillar payouts
Is this a precurser for other funds as well? Will this be the trigger to the next downturn? Aivars Lode
Switzerland’s first-pillar pension fund could be forced to sell off millions in assets per month to finance pensions if no long-term funding solution is found, the country’s government has warned.
The Swiss first pillar fund AHV/AVS is expected to amass a CHF43bn (€37.2bn) deficit by 2030, in a ‘worst-case’ scenario assuming no return on investments.
To ensure all pension payouts are met by then, the fund needs CHF53bn, the government said in a press release about a consultation on first-pillar reforms.
“Successful measures to ensure the stability of the AHV/AVS fund are urgently necessary,” the government stated. “Without them the fund would have to sell of assets worth CHF100m per month to be able to meet the pension payments.”
The first pillar AHV/AVS fund currently manages CHF37.6bn in assets and is continuously paying out pensions.
Money is expected to become tight from 2020 when the baby boomer generation enters the retirement phase.
To mitigate this, the government has proposed various measures to stabilise the financial situation of the AHV/AVS.
Reviving retirement reforms
The Swiss government wants to introduce a flexible retirement age, intended as a guideline, coupled with incentives to work longer. The new flexibility would make it possible to retire any time between 62 and 70.
A new “reference age” would remain 65 for men, and the age for women would be adjusted to match it in several stages.
To compensate women for the change, those closer to retirement age once the reform comes into effect would not be penalised for taking early retirement. In addition, those working beyond the reference age would be rewarded more than their male colleagues.
By increasing the reference retirement age for women by one year to match that of men, the government estimated additional income of CHF10bn – some of which would be used to finance the compensatory measures.
“The analysis of the referendum on 24 September 2017 has shown that increasing the retirement age for women makes compensatory measures necessary,” the government said in its statement.
In autumn last year, the Swiss electorate voted against a major comprehensive reform package for the whole pension system, the Altersvorsorge 2020. One of the points of contention was the lack of compensation for women affected by the rising retirement age.
After the reform proposal failed, the Swiss authorities have concentrated on the more urgent reform of the first pillar, saving necessary reforms in the second pillar for later.
The government plans to put more money into the AHV/AVS via “additional financing”, beyond possible capital returns from investments. One of these “additional pots” is to come from a proposed VAT increase of 150 basis points.
An Aussie who has lived around the world and done business in a large number of different countries. Aivars is an Ambassador for The Transparency Task Force, a collaborative, campaigning community dedicated to driving up the levels of transparency in financial services around the world.