SLI®-Swiss pension plan Benchmarking study 2017
SLI®- Swiss pension plan Benchmarking study 2017
Content Editorial...... 4 Executive Summary...... 6 Section A: Plan design features with a comparison of contri bution rates and parameters in previous studies...... 7 Section B: Quantitative assessment of benefit and contribution levels...... 14 Section C: Actions to be taken...... 22 Section D: Closing remarks...... 23
SLI® – Benchmarking study 2017 3 Editorial
Dear Reader
The predominant challenges that Swiss pension funds Again, regarding the question of which salary compo- now have to face are a constantly increasing life ex- nents – specifically the bonus – should be included, pectancy and record low rates of return. Even though different philosophies prevail among the various com- the average contributions of employees and employ- panies. Some believe that performance- and profit- ers in occupational insurance have risen compared to related salary components should be considered when the previous survey in 2015, these challenges have led calculating the overall standard of living. For these to a decline in the level of benefits for the companies companies, an adequate replacement of income in the of the Swiss Leader Index (SLI®) presented in this event of retirement, death or disability needs to take study. This is now already the fifth time that we have into consideration the level of incentive pay as well. investigated SLI pension plans. This year we have Others feel that performance-related remuneration is again analysed the current pension regulations for by its very nature variable, and therefore should neither these companies and calculated the benefit entitle- be relied on by employees when planning their living ments for three selected fictitious insured persons. standards nor be insured by companies. Our study This allows us to compare the expected retirement shows that the majority of SLI companies do include benefits of the individual companies against each the bonus as a component of the insured salary. other and over time. The latest study shows some interesting results that deserve attention. There are considerable differences, not only in the amount of funds allocated to the insurance compa- In this study, for the first time, we only included cash nies, but also in the rates of interest applied. The balance plans, i.e. plans where the contributions are technical interest rate used to calculate the reserve paid into an account and accrue interest, thus forming capital ranges from 1.75% to 3%, marking a definite the capital for retirement benefits. Traditional final pay decline compared to the previous study of 2015 – and defined-benefit plans were no longer offered. Apart from this with a lower dispersion. Here too there are clearly this common feature, however, significant differences in major differences between the individual company benefits were found among the individual pension funds. pension schemes. For instance, the pension benefits offered by one fund can be more than twice those offered by another. This Following the recent vote on Pension Reform 2020, the distinctive contrast can be traced to a range of varying main focus of public debate has been on the conversion plan design elements which are considered in detail in rate at age 65 which is used to calculate the retirement the study. pension, and here too there are large differences from company to company. Currently the rates vary between The contributions show two different worlds: For some 4.7% and 6.4%. It is apparent that different approach- companies, pension benefits are only a minor compo- es are being taken to manage the effects of declining nent of the total compensation package, while for others investment returns and rising life expectancy, yet the a very good pension and high contribution rates form a trend is clear conversion rates are falling, albeit to vary- basic part of the corporate culture. ing degrees, and with them, retirement benefits.
4 willistowerswatson.com Editorial
Overall, the average retirement benefits that a 25 year-old employee will accrue over the course of his or her career have fallen by 5 percentage points compared to our last study in 2015. However, this still means that on average 35% of the final salary is provided as retirement benefit at age 65.
We hope you find this an interesting read.
Stephan Wildner, Director of Retirement Services, Switzerland
SLI® – Benchmarking study 2017 5 Executive Summary
Overview of SMI® and SLI®
The SMI® (Swiss Market Index) and SLI® (Swiss Leader Index) consist respectively of the 20 and 30 largest com- panies on the Swiss stock exchange. The composition is checked regularly and can therefore change over time. We have based the analysis on those companies that were in the indices at the beginning of 2017.
In our study, the SMI® group therefore The SLI® companies are those shown includes: above plus: ABB Aryzta Actelion Balôise Adecco Clariant Credit Suisse Galenica Geberit Kühne + Nagel Givaudan Lonza Julius Bär Schindler LafargeHolcim Sika Nestlé Sonova Novartis Swiss Life Richemont This study includes 23 of the 30 SLI® companies. Roche SGS Swatch Group Swisscom Swiss Re Syngenta Dufry UBS Zurich Financial Services
6 willistowerswatson.com Section A
Section A: Plan design features with a comparison of contribution rates and parameters in previous studies
SLI® – Benchmarking study 2017 7 Section A
Pension plans in use in Switzerland fall into two main cat- Insured salary egories: those where the benefit at retirement is defined The pension plans covered in the study have different under a formula typically referencing the employee’s last approaches for determining what salary is to be insured. earned salary and years of service (defined benefit, or At some companies this is the base salary only, whereas “DB”, plans), and those where the benefit at retirement is at others the definition includes the additional, variable based on the employee’s accumulated account balance at pay (incentive pay). Some companies reduce the insured the time (defined contribution, or “DC”, plans 1). salary to coordinate with AHV/AVS, others do not. This Figure 1 shows the relationship between pension plans makes it impossible to compare employee or employer with defined benefits and pension plans with defined contributions on the basis of total contribution percent- contributions at the SLI® companies. The trend towards ages alone. Instead the calculation and thus the level of defined contribution plans, which has been observed the insured salary must also be taken into account. for several years now, is continuing. In 2017, none of the Further, many of the companies cover different portions participating companies offered its employees traditional of a salary within different plans. Some companies cover defined benefits on retirement. base salaries in one plan and bonus payments in another. Other companies set a limit for salaries to be covered in Figure 1: Types of pension plans (% of companies) the main plan, with the part of the salary exceeding that level covered in a supplemental plan. In this study these 100% aspects are taken into account when projecting the ex- pected retirement benefits.
80%
Figure 2: Bonus included in covered salary (% of companies)
60% 100%
40% 80%
20% 60%
0% 40% SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017
n Cash balance n Defined benefit 20%
0% SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017
n 100 % n proportion n none
1 These defined contribution plans are also called “cash balance” plans.
8 willistowerswatson.com Section A
Components of pay covered Figure 3: Maximum coordination offset in base plan (% of companies) We begin with an analysis of the components of pay that are 100% included in a covered salary. The decision whether or not to cover variable pay is often a philosophical one. Some com- panies believe that incentive pay is to be taken into account 80% when measuring the employee’s overall standard of living. For these companies, an adequate replacement income in the event of retirement, death or disability needs to consider the 60% level of incentive pay as well. Other companies believe that incentive pay based on performance and profit is by its na- ture variable and is neither something that employees should 40% rely on nor that the company should be insuring.
Figure 2 shows that most of the companies in the study now 20% cover variable components of salary within their pension plans. Interestingly, some companies include only a fraction 0% of the bonus (e.g. 75% of the target bonus) as covered SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017 salary, while others make no such adjustment. n 100 % AVS n 87.5 % AVS n less than 87.5 % AVS n none Coordination offset In defining the covered salary, many companies apply a deduction to the total salary. The idea behind this Salary limits “coordination offset” is to reduce the insured salary by Swiss law limits the total salary that can be covered for a an amount equal to the insured benefits already covered single member for pension purposes to CHF 846,000 (in under Swiss social security (AHV/AVS). The Swiss social 2017). Companies are free to choose a lower salary limit if security benefit for an individual varies by pay level but is desired. However, as shown in Figure 4, most companies capped at CHF 28,200 (in 2017). For the legal minimum do not restrict the total covered salary much below this BVG/LPP benefits, the coordination offset is 7/8 of the limit, if at all. maximum single AHV pension, or CHF 24,675 in 2017. The exclusion of a coordination offset tends to affect the benefits for lower-paid employees the most. Figure 4: Limit on covered salary (% of companies)
100% As shown in Figure 3, there is a significant variation in the amount of coordination offset actually taken into account by companies for insured salary purposes. 80% Since the redefinition of minimum BVG benefits some years ago, fewer and fewer companies are applying the full AHV deduction. 60%
40%
20%
0% SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017
n Above 750k n 350k to 749k n Less than 350k
SLI® – Benchmarking study 2017 9 Section A
Employee contribution flexibility Funding of the pension funds Since 2006 it has been permissible for pension plans to of- It is now more difficult than ever for the Swiss pension fer employees a choice of up to three different contribution funds to meet their obligation to provide the promised ben- rates. This means that employees can choose how much efits, financed by contributions from the employer and em- to contribute to the plan, and benefit levels are adjusted ployee as well as the returns on investments. Pension funds accordingly. Where this choice is provided, plans generally not only have to contend with the continuing low-interest allow the employee to modify his/her choice regularly (e.g. environment but also poor growth prospects. Additionally, at least once per year). However, under the applicable law we continue to see an increased life expectancy. Typically the company’s own contributions to the plan cannot vary. pension funds have responded to the higher costs by re- ducing technical interest rates as well as conversion rates. For example, if an employee is able to choose to pay 3%, Therefore the SLI® study examines these two parameters 6% or 9% of the insured salary into a plan, the company’s and the extent to which they have an impact on pension contribution would not vary (for example, at 15% of the plan benefits. insured salary). As a result, in this example the employee would receive total savings credit to their account balance Technical interest rates of 18%, 21% or 24% of the insured salary, depending on the choice made. The technical interest rate is a discount rate used to value anticipated future pension payments in the annual This flexibility for employees can make the plan more attrac- financial statements (“actuarial pension reserve”). Setting tive as they can then adjust their contributions according the technical interest rate is a challenging task, one that to their personal circumstances, with plan benefits being goes hand-in-hand with the long-term investment hori- adjusted accordingly. This arrangement can also be tax-ad- zon for actuarial pension reserves and the difficult job of vantageous, as employee contributions are tax-deducti- assessing future trends in investment returns. Each year ble for the employee. A further advantage of this design on 30 September, the Swiss Chamber of Pension Fund feature is that this can increase the scope for the employee Experts sets a technical reference interest rate, which to make voluntary purchases (one-off deposits with tax can be adjusted upwards or downwards. This is 2% as at advantages), since a higher contribution level increases the 30 September 2017. The underlying Guideline 4 of the maximum level of benefits provided under the plan. Chamber of Pension Fund Experts has been known as a point of reference for a long time now and is undisputed. Figure 5 shows that in 2017 more than two thirds of all SLI® The Chamber of Pension Fund Experts has, however, also companies offer a choice of employee contributions in their been working for some time on an alternative and a pos- pension plans. sible upgrading of Guideline 4 of the Chamber of Pension Fund Experts. A decision will be made about the new form of the Guideline at the general meeting of Pension Fund Figure 5: Employees have contribution choice (% of companies) Experts on 24 November 2017. 100% Figure 6 shows the spectrum of technical interest rates cur- rently being applied for the SLI® companies’ pension plans. 80% They range from 1.75% to 3%, with a mean of 2.34% and a median of 2.50%. One notes, firstly, the much lower varia- tion of the results of 2015 compared to 2017, and secondly, 60% that more than half of all the pension plans in the compar- ison will have to decide about a reduction of the technical interest rate in the short to medium term. The reduction in 40% the technical interest rate is directly linked to the pension plan’s funding ratio, since when the technical interest rate 20% is reduced, the actuarial pension reserves increase, thus reducing the funding ratio.
0% SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017
n yes n no
10 willistowerswatson.com Section A
Figure 6: Technical Interest Rate Figure 7: Technical interest rate less interest crediting rate
4.00% 2.0%
3.75% 1.5%
3.50% 1.0%
3.25% 0.5%
3.00% 0%
2.75% – 0.5%
2.50% – 1.0%
2.25% – 1.5%
2.00% – 2.0%
1.75% – 2.5%
1.50% – 3.0% SLI® 2013 SLI® 2015 SLI® 2017 SLI® 2015 SLI® 2017
n 1st quartile n 2nd quartile n 3rd quartile n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average n 4th quartile Average
Interest on retirement savings It is pleasing to note, however, that even with the low level of interest credit many pension funds were still able to While technical interest rates reflect the implicit interest grant interest above the BVG minimum interest rates, due rate that is credited to pensioners, the retirement savings to the decent returns and a relatively stable financial situa- of active members explicitly accrue interest at a sepa- tion. Figure 8 shows, while the minimum BVG interest rate rate rate. The interest rate for retirement savings must was 1.25% in 2016, active members received an average of be aligned partly to the minimum BVG interest rate and 1.69% for the same period, with the range of rates extend- partly to the return earned. Ideally, the interest rates for ing from 0.75% to 2.75%, thus extending at the lower end in pensioners and active members should be the same in comparison to 2015. the long term. Yet, the reality often looks quite different.
The technical interest rates for pensioners tend to be Figure 8: Interest crediting rates higher than the interest rates for active insured members, 5.5% which promotes the redistribution of assets to pension- ers – also a topic of controversial debate at the political level. Since the financial crisis many pension funds have 4.5% had to battle with low coverage ratios. As a result, addi- tional returns are used to bolster the fluctuation reserves instead of providing additional interest for active mem- 3.5% bers. This was also the case in 2016. The average rate of interest for insured members was 1.69%. As shown above, the average technical interest rate in 2017 was 2.5% higher (2.34%).
1.5%
0.5% 2014 2015 2016
n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average
SLI® – Benchmarking study 2017 11 Section A
Conversion rates and lump-sum payments Figure 9: Conversion rates, males, age 65 (above mandatory portion of balances) There is a substantial disparity seen in the level of conver- sion rates at retirement. This is the rate at which a mem- 7.50% ber’s accumulated retirement account balance is converted into a pension. This is only relevant for cash balance plans 7.00% since the pension provided under a DB plan is defined in advance. Conversion rates are typically communicated in 6.50% terms of the annual pension as a percentage of the total account balance; e.g. 5% means that the annual pension 6.00% would be equal to 5% of the account balance the member had at the time of retirement (thus for an account balance 5.50% of CHF 100,000, the annual pension would be CHF 5,000). 5.00% The conversion rate mainly factors in information about mortality rates and expected returns, allowing a simple 4.50% SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017 conversion of retirement capital to a life-long pension. Swiss law requires a minimum conversion rate to apply n 1st quartile n 2nd quartile n 3rd quartile to the legal minimum benefits. Pension funds are free to n 4th quartile Average define a different conversion rate as long as at least the legal minimum benefit is provided in the end. The legal There is a clear trend to ever-lower conversion rates. In conversion rate at statutory retirement age is still 6.8%. 2011, conversion rates were 6.5% or higher for 50% of all The minimum conversion rate is currently a significant participating SLI® companies. Six years later, the conver- topic of discussion since among experts it is widely seen sion rates of all companies were below 6.5%. Only 17.4% of as too high, due to increases in life expectancy and lower all SLI® companies still apply a conversion rate higher than returns on plan assets. A statutory reduction of the min- 6%. Thus, many companies have already taken measures imum conversion rate was rejected by Pension Reform to allow for the current actuarial and market reality. 2020, the Swiss referendum in September 2017.
The majority of SLI® companies apply one conversion rate Many Swiss pension funds are reducing their conversion to the total retirement account balances. Only one company rates as a result of low investment returns and the contin- allows for split conversion rates between the BVG mandatory uing trend of increasing life expectancy or have already and over-mandatory account balances. All conversion rates done so. Figure 9 shows the current range of conversion in Figures 9 and 10 relate to the conversion rates for the over- rates currently used by SLI® companies. It shows the con- mandatory portion, if applicable. version rates used to convert total retirement savings into a pension. The chart shows a clear reduction across the board. It is interesting to note the reduction in all quartiles from 2015 to 2017, where the range did not change sig- nificantly but the minimum and maximum values sharply declined. In 2017, conversion rates range from 4.70% to 6.40% and an average value of 5.43%. The average con- version rates were considerably higher in the studies of 2015 and 2013, at 6.05% and 6.32% respectively.
12 willistowerswatson.com Section A
Figure 10: Conversion rates, males, age 65 Survivor benefits (above mandatory portion of balances) (% of companies) Pension plans are required to offer pensions to surviving 100 % spouses and dependent children upon the death of an active member. No additional lump sum death benefit is 80 % necessary. Nonetheless, all of the SLI® companies provide an additional lump sum death benefit so some degree.
60 % As Figure 12 shows, the majority of insurance companies pay out the account balance, although this is typically reduced by the value of surviving spouse and dependent 40 % children pensions that will be payable. Others provide a lump sum death benefit that is independent of employee savings, such as a percentage of the last insured salary. 20 %
Figure 12: Lump sum death benefits 0 % SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017
n > 6.5 % n 6.25 % to 6.49 % n 6.00 % to 6.24 % n Account balance n 5.75 % to 5.99 % n 5.50 % to 5.74 % 7 (sometimes reduced n 5.25 % to 5.49 % n 5.00 % to 5.24 % n < 5.0 % by value of survivor benefits) Percentage of Some companies have gone a step further and do not n account balance convert part of the retirement savings into a pension at all. 14 Death benefit inde- In such cases, the non-mandatory portion is therefore paid n 2 pendent of account out as a lump sum upon retirement. balance
As shown in Figure 11 below, 13 SLI® companies use a single conversion rate for converting retirement savings into a pension, while 9 SLI® companies do not convert part of the retirement savings into a pension, and only allow a lump sum payment. Only one SLI® company provides for different conversion rates in its pension plan. This indicates a clear shift to a prescribed lump sum payment for a part of the retirement savings.
Figure 11: Conversion rate versus lump sum options
n Single conversion rate of total account 9 balance n Separate conversion rates on different 13 account balances n Portion of account balance restricted to lump sum benefits 1
SLI® – Benchmarking study 2017 13 Section B
Section B: Quantitative assessment of benefit and contribution levels
14 willistowerswatson.com Section B
As a general rule, pensions in Switzerland are the largest Female, age 45, base salary CHF 200,000. We assume element of compensation for employees aside from regular that she has a target bonus equal to 20% of her base salary and bonus. However, it is extremely difficult to com- salary, and that she joins with initial vested benefits of pare plan benefits and costs simply by reviewing the plan CHF 300,000 (of which CHF 75,000 is the legal mini- rules alone. The interaction of such factors as the inclusion mum portion). or exclusion of variable pay, the existence or not of sup- plemental plans and the varying levels of conversion rates Details of other assumptions made when deriving the costs at retirement means that the relative worth of the different and level of benefits are described in the appendix. companies’ plans cannot be readily assessed. We therefore compare plans by calculating the level of benefits earned Insured salary for three different fictitious employee profiles at each of the companies included. We discussed in the prior section that companies have different definitions for what pay is covered for pension Male, age 25, base salary CHF 60,000. We assume he benefits. As a result, the insured salary will vary by individ- receives no incentive pay and starts with no initial vested ual depending on his/her base pay level, bonus and some- benefits. times his/her position within the company (e.g. manage- Male, age 35, base salary CHF 120,000. We assume he ment vs. non-management). In Figure 13 we compare the has a target bonus equal to 10% of his base salary, and insured salaries for the three profiles described above. that he joins with initial vested benefits of CHF 60,000 (of which CHF 30,000 is the legal minimum portion).
Figure 13: Insured salary (as a % of base pay)
140%
120%
100%
80%
60%
40%
20%
0% Age 25 Age 35 Age 45 base CHF 60,000 base CHF 120,000 base CHF 200,000 no bonus bonus CHF 12,000 bonus CHF 40,000
n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average BVG Minimum
SLI® – Benchmarking study 2017 15 Section B
The wide disparity is striking. For the first profile, some Employer contributions companies insure only 59% of base pay while others insure Employer contributions are often very difficult to compare. 100%. This in itself doesn’t say anything about overall plan The statutory provisions require that they must be in ag- benefit levels, as the contribution percentages could be gregate (i.e. across all age groups) at least as high as total much higher in the first case than in the second. Nonethe- employee contributions. Aside from this, however, there less, it shows why one should not simply look at contribu- is substantial flexibility as to how these are set for each tion percentages alone when comparing plans. company. Equally striking for the latter two profiles is that the legal For example, a few pension plans differentiate between minimum insured salary level is only a small fraction of the “regular” and “extraordinary” contributions, where regular base salary. All of the SLI® companies insure salary levels contributions are paid each year and extraordinary contri- that are considerably higher. butions are only required in special cases, such as when a member retires early. In such a case the company’s contri- Employee contribution rates butions are relatively low at first and later increase. A similar For all of the companies analysed, employees are asked to situation occurs when extra contributions are required under contribute towards the plan benefits. These contributions a DB plan each time the employee’s salary increases. The may vary by age or salary level. Figure 14 shows how the coverage level of the pension fund may also influence contri- employee contribution rates compare for a typical career bution levels: in some plans, the company can benefit from and against the legal minimum level. a reduction in contributions (“contribution holidays”) when funding levels meet certain thresholds; conversely, additional “recapitalisation” contributions may be needed in case of underfunding.
Figure 14: Employee contribution rate over assumed career (as a % of future base salaries)
14%
12%
10%
8%
6%
4%
2%
0% Age 25 Age 35 Age 45 base CHF 60,000 base CHF 120,000 base CHF 200,000 no bonus bonus CHF 12,000 bonus CHF 40,000
n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average BVG Minimum
16 willistowerswatson.com Section B
Figure 15: Employer contribution rate over assumed career (as a % of future base salaries)
30%
25%
20%
15%
10%
5%
0% Age 25 Age 35 Age 45 base CHF 60,000 base CHF 120,000 base CHF 200,000 no bonus bonus CHF 12,000 bonus CHF 40,000
n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average BVG Minimum
Figure 15 shows this comparison for the three fictitious adjustments to contributions are not made over time (and profiles over their assumed careers. This shows the regu- if investment gains are not forthcoming), pension plan lar contributions as defined in the plan rules, but does not funding levels will tend to deteriorate. take into account recapitalisation contributions or contri- bution holidays. Changes in employee and employer contributions since 2011 Even where pension plans foresee only fixed contribu- tions without the extraordinary elements described above, Figure 16 below shows the level of plan contributions paid deficits can arise because contributions may be structur- by the first employee profile since 2011. It can be seen that ally too low relative to the benefits provided. One example average employee contributions stayed relatively at the of this is providing pension conversion rates in excess of same level from 2011 to 2015. In 2017 they again rose slight- those that can be actuarially sustainable. If appropriate ly for the first time since 2011.
Figure 16: Comparison of employee contribution rates over assumed career according to our benchmarking studies from 2011 to 2017 – for a 25 year old employee with an initial base salary of CHF 60'000 (only includes companies that participated in all 4 studies)
8%
6%
4%
2%
0% SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017
n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average BVG Minimum
SLI® – Benchmarking study 2017 17 Section B
Figure 17: Employer contribution rate over assumed career for age 25 base CHF 60k, no bonus (only companies that participated in the 4 latest studies) (expressed as a % of base salary at retirement)
25 %
20 %
15 %
10 %
5 %
0 % SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017
n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average
Figure 17, as counterpart to Figure 16, shows the corre- Structural underfunding of the pension plans sponding employer contributions. It is evident that they In Figure 18 we show a measure of the plans’ structural have increased in every period reviewed from 2011 to 2017. underfunding (“unfunded benefits”). This is the value of ben- On average the employer contributions have increased by efits expected to be provided, less the value of employee 0.6 percentage points from 9.7% in 2011 to 10.3% in 2017. and employer contributions (including initial vested benefits This shows that the increase in employer contributions could brought by new hires). For younger employees, this tends to only partly compensate for the reduction in conversion rates be negative (i.e. the plan makes a gain) – typically because that took place at the same time in the same periods. the contributions for risk benefits are higher than needed for this group, and solidarity exists between the members. For older employees, the opposite is true. Further, older employ-
Figure 18: Value of unfunded future benefits (expressed as a % of expected future base salaries)
10 %
8 %
6 %
4 %
2 %
0
– 2 %
– 4 % Age 25 Male Age 35 Male Age 45 Female base CHF 60k base CHF 120k base CHF 200k no bonus bonus CHF 12k bonus CHF 40k Vested benefits: none Vested benefits: CHF 60k Vested benefits: CHF 300k
n 1. Quartil n 2. Quartil n 3. Quartil n 4. Quartil
18 willistowerswatson.com Section B
ees are more likely to stay with the company until retirement Predicted benefit at retirement and benefit from subsidised conversion rates. There are also We next look to the projected level of pensions at retire- differences by gender – according to the BVG/LPP 2015 ment. Figure 19 shows the pension benefits available at assumption set, females tend to have higher costs of risk retirement (age 60 and 65/64) for the same three profiles benefits than males. described above. Benefits at all companies substantially Most of the companies in the SLI® provide benefits that in- exceed BVG/LPP minimum levels. crease with age. Thus, older employees tend to have high- These levels do not include the first-pillar benefits from er pension costs than younger ones simply because the AHV/AVS. It should be kept in mind that first-pillar benefits plans are designed that way. This may have implications for are much more significant for lower-paid members, as the the companies’ willingness to hire or retain older workers, maximum annual pension payable from the first pillar is as the employer contributions may be significantly higher CHF 28,200 (in 2017); for higher-earners, this replaces only than for a younger employee at the same salary level. a small portion of their overall compensation. For example, Further, as companies mature (i.e. the average age of their full first-pillar benefits would represent about 13% of the employees increases), their average costs tend to rise. income at retirement of the age 45 profile member above, if the 1.75% salary increases included in the model are taken into account.
Figure 19: Pension levels at retirement (as a % of base salary at retirement)
60 %
50 %
40 %
30 %
20 %
10 %
0 % Retirement at 60, Retirement at 60, Retirement at 60, Retirement at 65, Retirement at 65, Retirement at 64, currently age 25, currently age 35, currently age 45, currently age 25, currently age 35, currently age 45, earning CHF 60,000 earning CHF 120,000 earning CHF 200,000 earning CHF 60,000 earning CHF 120,000 earning CHF 200,000
n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average BVG Minimum
SLI® – Benchmarking study 2017 19 Section B
Also, as seen earlier, employee contributions are not iden- Changes in retirement benefits since 2011 tical for each company, so there is some variation in how Figure 20 shows the change in retirement pensions for a much of the benefit has been financed by the employee selected employee profile from 2011 to 2017. To improve versus the employer. comparability, only those companies that have taken part It is particularly surprising that benefits at age 64/65 from in all four studies (17 companies) are considered. The chart the most generous pension plans may be twice as high as shows that the average benefits have continually declined those in the lower end of the range. This is the case both from 2011 to 2017. This trend, however, is clearly more for benefits paid as a lump sum or as a pension. pronounced in 2017 and the pension benefits have signifi- cantly decreased from previous years. They are now at an This difference in benefits is particularly apparent for the all-time low of 35.6%, which represents a decline in levels first profile. If we take two individuals matching this profile, by 5 percentage points compared to 2015. with one working at the company with the most generous pension provisions and the other at the company with the The pension benefits in the above comparison from the least generous, the former would retire at age 65 with pen- past 6 years have fallen by an average of almost 7 percent- sion benefits of 56.5% of his last base salary (excluding age points compared to our study from the year 2011 and AHV/AVS), and the latter with only 23.0%. The range for 5 percentage point compared to the 2015 study. This is due the other two profiles is less pronounced but nonetheless to the reduction of conversion rates, especially in the re- significant. cent periods. While the reductions in conversion rates until 2013 were compensated by higher employee and employer contributions, this trend has not continued as noticeably in 2015 and 2017. This shows that when conversion rates re- duce and thus decrease benefits it is no longer necessarily compensated for by increased contributions.
Figure 20: Comparison of pension levels at retirement according to our benchmarking studies from 2011 to 2017 – for a 25 year old employee with an initial base salary of CHF 60’000 (only includes companies that participated in all 4 studies)
70 %
60 %
50 %
40 %
30 %
20 %
10 %
0 % SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017
n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average BVG Minimum
20 willistowerswatson.com Section B
Risk benefits The level of risk benefits, i.e. those payable in case of death or long-term disability, also varies by plan. Minimum levels are required by law; however, all of the SLI® compa- nies provide benefits that are considerably more generous.
Figure 21 shows the estimated value of risk benefits for each of the three employee profiles over a one-year period. This takes into account both the likelihood of becoming disabled or dying, and the value of the resulting benefits that would then become payable. As noted previously, the average value of risk benefits tends to increase with age and salary and also varies by gender.
Figure 21: One-year term value of risk benefits (as a % of base pay)
7 %
6 %
5 %
4 %
3 %
2 %
1 %
0 % Age 25 Age 35 Age 45 base CHF 60,000, no bonus base CHF 120,000, bonus CHF 12,000 base CHF 200,000, bonus CHF 40,000 vested benefits: none vested benefits: CHF 60,000 vested benefits: CHF 300,000
n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average BVG Minimum
SLI® – Benchmarking study 2017 21 Section C
Section C: Actions to be taken
The present study shows that benefits from occupational Investment strategy: It is imperative to take new ap- pensions are decreasing, even though the ability to retire proaches in investment strategy because of the interest- with a decent benefit is an ever-growing concern. The low rate environment. Aside from a diversified investment interest-rate environment with its below-average expect- strategy the selection of really successful managers is ed returns and increased life expectancies are present- crucial. When using modern asset classes, however, it is ing great challenges to Swiss pension funds. These are important to remember than they require higher levels of not just going to disappear overnight, nor can they be control and governance – where there is a potential for influenced by the government. It is precisely because no higher reward there is always higher risk, which needs to miracles are expected either from the market environment be actively managed. or from politics that the decision-makers in Swiss pension Governance: On the one hand, good decisions require ex- funds will have to develop new paths in order to ensure perience and expertise on the part of the decision-mak- that the interests of all beneficiaries are satisfied with a ers, which result from increased professionalism of the sustainable design of the pension plans. pension fund managers. On the other hand, instruments are needed to quantitatively show various alternatives for A sustainable pension plan should follow these guide- action. In this way the alternatives can be appropriately lines: the targeted level of performance can be achieved assessed before the changes are applied by the Founda- with known costs, limited redistribution, and appropriate tion Board. investment risk. The main points for pension funds are already on the table: Accounting: More accurate approaches to valuation in accordance with international accounting standards, such Total rewards approach: the occupational pension is an as the hotly discussed current topic of “risk sharing”, allow important instrument of remuneration, but the expense employers flexibility and “room to breathe” with balance for the employer is substantial. This makes it all the more sheets and income statements. important to align the total rewards package to the mar- ket, and maintain competitiveness. Employers can use a Therefore decision-makers have many tools at their dispos- high weighting of the occupational pension to consciously al to ensure that occupational pensions are fit for the future. set the market direction. Pension plan: The pension plan should be understand- able and clear communication is key so employees are able to correctly assess the value of their pension. It is also important have clear and simple administration in the pension design. In times of low-interest rates, be- sides the costs of investment, it is particularly the costs of administration that also reduce the interest provided to plan members.
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Section D: Closing remarks
SLI® – Benchmarking study 2017 23 Section D
This study only covers the pension arrangements provided Confidentiality by each company, and ignores other elements of compen- Information on individual companies’ plans is held strictly sation. If these other elements were included, the results confidential. of the comparison might look quite different.
We are extremely grateful to all of the participating SLI® Disclaimer companies for their assistance with this survey. This report was prepared as a summary of Willis Towers Watson’s research. Unless otherwise specifically agreed in Survey methodology writing we assume no responsibility, duty of care or liability For the purposes of this study, we have looked only at to those who may gain access to a copy of this document those plan benefits that are available to new hires at each and any such reliance that they place on it is entirely at company. Special benefits (or “grandfathering”) for exist- their own risk. ing groups were not considered. This report does not purport to be and is not a substitute In order to review the cost and value of benefits, we have for specific professional advice. Specific advice should be made a number of assumptions. Key among these are the taken on the circumstances in question before any action following: is taken.
Salary increases of 1.75% per year Interest credits in cash balance plans of 2.25% per year Further information BVG 2015 turnover, disability, and generational mortality rates If you would like further information, please contact
Retirements would be from age 60 at the rate of 10% per Daniel Blatter year until latest age 65/64 (men/women) +41 43 488-4407 Members are assumed to prefer a pension at retirement [email protected] to a lump sum if such a choice is available Eileen Long Members contribute at the “standard” or “default” rate as +41 43 488-4491 defined by each plan if such a choice is available [email protected] Where plans provide only for lump sum benefits, insurance company tariffs have been assumed to apply for conver- sion to pensions In some charts, comparisons are made against a hypo- thetical BVG/LPP minimum plan. For this purpose, the account balance was projected at the current BVG/LPP minimum interest credit rate of 1%.
The salary increase and interest credit assumptions were adjusted for the 2017 study in order to reflect the current market situation.
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About Willis Towers Watson Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dat- ing to 1828, Willis Towers Watson has 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and ex- pand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas – the dynamic formula that drives business performance. Together, we unlock potential. In Switzer- land Willis Towers Watson is based with offices in Zurich, Geneva and Lausanne.
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