For the first time in 20 years, inflation eroded the interest on pension funds in 2022 and caused a real interest loss for policyholders. What do policyholders have to prepare for this year?
Iwan Deplazes: Based on current observations, 2022 is likely to be an outlier. The rapid cycle of interest rate hikes had caused the valuations of equities and bonds to plummet at the same time. Together with high inflation rates, we saw negative real interest rates for the first time in 20 years in 2022. In contrast, equity markets performed remarkably well during the first half of 2023 – even against the backdrop of a globally impending recession.
Francesca Pitsch: The rise in the cost of living, which was relatively modest here in Switzerland when compared to other countries, has slowed down in the last six months. However, this can quickly change again when you see the electricity and gas price increases announced recently. According to the Swisscanto Pension Funds Monitor, Swiss pension funds are likely to have generated cumulative returns of 4.1 percent on average in the first half of 2023 (excluding costs).
In Switzerland, the Occupational Pension Funds Commission (BVG-Kommission) has recently recommended raising the minimum interest rate to 1.25 percent to take account of the increase in inflation. What do you think about this?
Francesca Pitsch: Trade unions have actually called for 2 percent or more. The current proposal is a political compromise. The Swiss Federal Council will now set the minimum interest rate. The interest environment for new investments by pension funds has noticeably improved – at least the yields of Swiss government bonds are above the required minimum interest rate again.
Iwan Deplazes: The positive signs must not obscure the fact that the financial markets continue to fluctuate between concerns about inflation and recession. In view of the looming economic cooling in Switzerland and the major economic regions – especially in the USA – and the related situation on the financial markets, great caution is still required. Pension schemes must first build up their reserves again. The difficult investment year of 2022 has highlighted how important they are.
In 2024, the current reform to occupational pension law and consequently the cut in the conversion rate from 6.8 to 6 percent will be put before the electorate. Is this step even needed in view of the turnaround in interest rates?
Francesca Pitsch: Yes. The cut is necessary mainly due to higher life expectancy. Saved capital simply has to last for longer. Even a conversion rate of 6 percent is still far too high due to the current market interest rates – but the gap between this and the mathematically correct rate, which ranges between 4.8 and 5.2 percent depending on the calculation applied, is narrowing.