"The ETH Domain has developed an excellent solution”
On 1 January 2019, PUBLICA will adjust the technical interest rate and conversion rate that determine new pension amounts. Dieter Stohler, PUBLICA Director, explains the background behind this decision.
Mr Stohler, PUBLICA has decided to adjust the technical interest and conversion rate parameters downwards as of 1 January 2019. What are the reasons for this?
There are two main reasons: firstly, we anticipate lower investment returns as a result of the lower interest rates; secondly, life expectancy is increasing in Switzerland – which means that pensions continue to be paid out for longer. These two factors mean that we need to lower the conversion rate, thus reducing the level of benefits paid out relative to retirement assets.
You are expecting lower investment returns. Was the 6.75% return in 2017 unusually high for PUBLICA?
Yes. The key is to look at the average over several years. The average return over the past 15 years is around 3%; this is not enough to finance the needs of all active members and beneficiaries, as the pension requirements are based on a technical interest rate of 2.75% – which means that beneficiaries are guaranteed a life-long interest rate of 2.75%.
We also need an additional return of 0.6 percentage points per year to finance the increase in life expectancy. The expected investment return for the next few years is around 2%. That’s why PUBLICA has decided to lower the technical interest rate from 2.75% to 2%, thus also lowering the conversion rate from 5.65% to 5.09%.
In order to maintain pension levels to some extent, certain support measures have also been proposed, including an increase in savings contributions. This is subject to the Federal Council’s approval in April.
Are there other reasons for the cut?
Another key argument in favour of adjusting the technical interest rate is that it is important to try to treat beneficiaries and active members equally. In recent years, we’ve had to set aside so much capital for beneficiaries that less has been left over for interest on active members’ assets.
You anticipate a 2% return. How is PUBLICA invested?
We are overweight bonds, with 29% in equities and a target real estate allocation of 11%. We also have holdings in precious metals and private equity. We’re still under our 11% real estate target as we’re in the process of ramping up our real estate portfolio – primarily outside of Switzerland.
PUBLICA makes the investment decisions rather than the ETH Domain pension plan.
The ETH Domain pension plan has its own parity commission that acts as a kind of board of trustees for the ETH Domain pension fund. And the ETH Domain has an employer and employee seat on the PUBLICA Board of Directors. This is PUBLICA’s highest governing body and it has the same amount of employer and employee representatives.
The Board of Directors has been assigned certain management responsibilities, some of which it has delegated to the parity commission of the ETH Domain pension fund. But the parity commission has no expertise in the field of asset management.
Investments are pooled by PUBLICA across all member pension plans. However, as the ETH Domain employee representative on the Board of Directors – Philippe Thalmann, a professor at EPFL – is also a member of the PUBLICA investment committee, the ETH Domain can also have an indirect influence on the investment policy.
How independent is the ETH Domain pension plan?
The ETH Domain pension plan and ETH have shown their independence and sense of responsibility towards their members through the cushioning measures they have developed as an excellent solution to the upcoming cuts. Over the years, the ETH pension plan has followed a very prudent strategy and increased provisions, thus allowing it to offer such an effective solution.
If people are worried about receiving an adequate pension, is it worth them making voluntary contributions into the ETH Domain pension plan?
Additional contributions will still help to increase benefits on retirement – even if members have to pay in more for every one franc of benefits than they used to. At PUBLICA, interest on assets has never dropped below 1%, which is higher than the interest on a bank account. Voluntary contributions are also tax deductible.
Glossary
The technical interest rate corresponds to the assumed interest on assets after retirement and is fixed based on expected investment returns.
The conversion rate is multiplied by the retirement assets upon retirement to give the annual pension amount.
Further information at: external page PUBLICA.
PUBLICA at a glance
The Swiss Federal Pension Fund PUBLICA is an independent pension institution established under public law. It is organised as a collective institution currently comprising 20 pension plans.
PUBLICA advises some 64,000 active members and around 42,000 pension recipients from the Federal Administration, the ETH Domain and other decentralised administrative units as well as around 70 other organisations that are closely associated with the Confederation or fulfil a public task on behalf of the Confederation, a canton or a commune.
With total assets currently standing at approximately 40 billion Swiss francs it is one of the largest pension funds in Switzerland. Its highest management and strategic body is the PUBLICA Board of Directors. Dieter Stohler has been the Director of PUBLICA since 1 January 2012.