More and more insured people are opting for capital instead of pension

Many Swiss pension funds have cut their pensions in recent years. The reductions in conversion rates are fuelling people’s concerns that they will not have enough money in old age. This may have been an important reason for the Swiss Federation of Trade Unions’ initiative to introduce a 13th AHV pension being accepted in March.

The capital saved in the pension fund is multiplied by the conversion rate, which gives the total annual pension. For example, if the capital is 500,000 francs and the conversion rate is 6 percent, the insured person receives a pension of 30,000 francs per year from the pension fund. If, however, the pension institution reduces the rate to 5 percent, the annual pension falls to 25,000 francs.

Capital payments not included

As the new pension statistics published by the Federal Statistical Office (BfS) in November last year show, the median amount of a newly paid old-age pension from occupational pension schemes in 2022 was 1,217 francs for women and 2,077 francs per month for men. In the median, half of the pensions paid out are higher and the other half are lower than the corresponding amount.

At first glance, this does not seem particularly generous. However, this does not take into account the fact that many people withdraw all or part of their pension fund savings when they retire. This money is then not included in the pension. For 2022, the median amount of capital benefits paid by pension funds and vested benefits institutions was around CHF 153,600 for men and CHF 65,600 for women.

Take a close look at pension fund pensions

The debate about reduced pension fund pensions is therefore worth taking a closer look at. The think tank Avenir Suisse also points this out in a new analysis. According to this, the average total benefits from occupational pensions fell only slightly between 2015 and 2022 – contrary to popular belief.

This is due to the fact that the importance of capital withdrawals has increased – and pensions have been lower as a result, because the money was taken out of the savings capital pot and was missing from the pension calculation. According to Jérôme Cosandey of Avenir Suisse, who conducted the study together with Sonia Estevez, the proportion of new pensioners who had their pension fund capital paid out in full or in part rose by 7 percentage points to 56 percent between 2015 and 2022. The median amount of savings withdrawn increased from 85,000 to 114,000 francs.

In order to get a more accurate picture of the development of total benefits from occupational pensions, Avenir Suisse has calculated how high the pension would be if no capital payments had been made. The capital paid out is converted into hypothetical annual pensions. With an average conversion rate, the reduction in the pension would not be 9, but only 5 percent for the period 2015 to 2022. If one takes into account that pensions are paid out on average for six months longer due to increasing life expectancy, the alleged significant reduction in benefits is even smaller.

Benefits for women increased

According to the think tank, women’s benefits have actually increased by 2 to 6 percent between 2015 and 2022, depending on the conversion rate, taking into account the higher life expectancy. For men, however, they have fallen by 4 to 9 percent. The higher benefits for women can be explained by the greater participation of women in the labor market, says Cosandey.

The pension fund study presented by the pension provider Swisscanto at the end of May also showed the growing importance of capital payments in occupational pensions. According to this study, in 2022, 37 percent of men withdrew their pension fund assets exclusively as capital upon retirement. In 2015, the figure was 29 percent. For women, the figure was 37 percent, compared to 32 percent in 2015.

Conflicts of interest in consultations

The increased withdrawal of capital benefits from pension funds is not without its problems. It can be assumed that many pensioners opt for this because of the lower conversion rates offered by pension funds. However, financial circles say that many people are not sufficiently aware that the money must then last until the end of their lives. In addition, it becomes increasingly difficult to manage money yourself as you get older, as your cognitive abilities decline.

There is therefore a lot to be said for calculating the expected cost of living in old age and covering this with a regular income – primarily pensions, but also rental income, for example. Only when the cost of living is covered should one think about capital payments from the pension fund.

There is also a risk that some insured persons will ignore the risks of the financial markets or will be given incorrect advice. After all, some financial advisors have a vested interest in private individuals withdrawing capital from the pension fund and then leaving the management of the assets to them.