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Swiss plan to cut obligatory pension rate to record low

Published 28/10/2015, 13:25
© Reuters.  Swiss plan to cut obligatory pension rate to record low

By John Miller

ZURICH (Reuters) - Switzerland will cut the minimum interest rate for obligatory occupational pensions to a record low on grounds that global low-interest policies and volatile markets have dented returns, the governing Federal Council announced on Wednesday.

The cut to 1.25 percent from 1.75 percent will take effect Jan. 1, 2016 and cover returns on Swiss retirement accounts managed by companies including Swiss Life (VX:SLHN), Switzerland's biggest life insurer. Pension fund managers have sought a lower rate.

Switzerland guarantees a floor for returns on obligatory pensions to protect lower-income residents. Still, Swiss law requires the minimum be set at a rate reflecting returns on government bonds as well as stocks, bonds and property markets.

The Swiss National Bank currently charges 0.75 percent on some Swiss franc deposits as part of efforts to weaken the currency against the euro, while the interest rate on Switzerland's seven-year government bond was -0.38 percent at the end of July. Meanwhile, Switzerland's benchmark Swiss Market Index has fallen by more than 1 percent this year.

"Lower interest rates this year have created difficulties for pension fund managers," said Joseph Steiger, a spokesman for the Swiss Federal Office for Social Security. "And stock markets haven't produced extraordinary returns, either."

Swiss employee groups criticized the move. "The Federal Council is taking too negative view of the investment environment. Property and many stocks still promise good returns," said the association Angestellte Schweiz. "Once again, workers will bear the brunt of this reduction."

The Swiss Insurers Association, of which Swiss Life is a member, said on Wednesday that the cut was insufficient. It had suggested a cut to 0.75 percent. "An even greater reduction was called for," the group said in a release.

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The obligatory portion of Swiss pensions stands at about 152 billion Swiss francs (101 billion pounds), out of total pension assets worth 720 billion francs.

As high as 4 percent as recently as 2002, the minimum annual rate has been fixed at 1.75 percent annually since the beginning of 2014, when it was raised from 1.5 percent.

The cut was anticipated after a strong majority of members of the Swiss Federal Commission for Occupational Pensions in August recommended the move.

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