How to measure the quality of the pension fund

Once again, a planned reform of occupational pensions has failed at the ballot box. However, the debate on the proposal has at least led to many insured persons taking a close look at their pension funds.

This is all the more important as it is the most important asset for many people in Switzerland – and is of crucial importance for their standard of living in old age.

Should you buy into your pension fund or not?

In addition, the end of the year is approaching and many insured people are wondering whether they should make voluntary payments into their pension fund. Such purchases can be deducted from taxable income and can often be used to break the tax progression. The tax saving effect is particularly great for people aged 50 or over, as they have less time until retirement.

When looking for a job, it is also important to take a close look at the occupational pension benefits of potential employers. “When choosing a job, many employees only look at the salary, not the pension benefits of the employer,” says Tashi Gumbatshang, pension expert at Raiffeisen. Many are not even aware that the pension fund is an important part of the salary. There are big differences between pension funds when it comes to the voluntary, non-mandatory parts of the pension scheme introduced by employers, he continues. Larger companies with their own funds often have the best pension solutions for employees.

Which key figures are important

It is important for all insured persons to assess the quality and benefits of their pension fund. This can be done using a number of key figures.

1. Coverage ratio: First of all, a pension fund should have a coverage ratio of at least 100 percent, or better still, a little more. If this is not the case, there is a risk that the fund will have to be restructured and the insured will have to make a contribution. The coverage ratio indicator provides information on whether the pension fund’s obligations are covered by its assets. At the end of last year, the coverage ratio of private pension funds in Switzerland was on average 113.5 percent, as shown by the Swisscanto study, which is widely followed in the industry.

However, insured persons should also be aware that the coverage ratio has limited significance. It depends, among other things, on the technical interest rate set by a pension fund – the higher the interest rate, the higher the coverage ratio.

2. Technical interest: The technical interest rate is set by the pension fund’s board of trustees. As a rule of thumb, it should not be higher than the expected returns on the pension fund’s assets. Funds with a low technical interest rate therefore calculate cautiously and accept a lower coverage ratio. If the technical interest rate is too high, there is also a risk of a redistribution from active insured persons to pensioners. Here, too, an individual assessment is necessary: ​​pension funds with high coverage ratios can often “afford” higher technical interest rates.

As the consulting firm PPCmetrics explains in its yearbook for 2024, the average technical interest rate of pension funds last year was 1.63 percent. The differences between the funds, however, were very large, ranging between 0 and 2.75 percent.

3. Amount of the conversion rate: When you retire, the pension fund assets you have saved are multiplied by the so-called conversion rate to calculate the amount of your annual pension. So if a person has saved up capital of 500,000 francs and the conversion rate is 5 percent, they will receive a pension of 25,000 francs per year.

According to the consulting firm Complementa, the average conversion rate of Swiss pension funds for insured persons aged 65 was 5.23 percent this year. Although many pension funds have significantly reduced the conversion rates in recent years, this still tends to be too high. Since conversion rates that are too high lead to an undesirable redistribution from active insured persons to pensioners, many funds have decided to make further reductions for the next few years. According to Complementa, the average conversion rate is expected to fall to 5.1 percent by 2029.

4. Employer contributions to the pension fund: The amount of employer contributions also varies depending on the pension fund. The employer’s contribution to the occupational pension scheme must be at least as high as the total contributions of its employees, says the Federal Social Insurance Office (FSIO). “Many employers pay two-thirds of the contributions,” says Gumbatshang. This is often not appreciated enough by employees. “Many employees don’t even know it.”

5. Investment strategy, returns and costs: A high interest rate on retirement savings is only possible if the pension fund achieves good returns on its investments. It therefore does no harm if the insured persons find out about the investment policy of their pension fund. Information on this can generally be found in the pension fund’s annual financial statements. Members of the foundation board can also provide information.

There is also a wide range of investment returns between pension funds, as can be seen year after year. According to the Swisscanto study, for which 483 funds were surveyed, the average return of the best ten percent of funds last year was 8.2 percent, while that of the worst ten percent of funds was just 2.3 percent.

The asset management costs of pension funds can also be an issue in this context. These are the fees that financial institutions charge for investing pension fund money. Insured persons can look or ask the board of trustees of their pension fund how high these costs are. According to the consulting firm C-Alm, they averaged 0.56 percent of the investment volume in 2022. If the costs of your own pension fund are higher, it is interesting to see whether this is also reflected in higher returns or not – and vice versa.

6. Interest on retirement savings: There are also big differences between pension funds when it comes to the interest paid on retirement savings. The best ten percent of funds paid an average of 3.7 percent interest on retirement savings in 2023, according to the Swisscanto study. The worst funds, on the other hand, paid an average of just 2 percent.

Many insured people do not even know how well or badly their pension fund pays interest on their retirement savings, says Gumbatshang. But the interest rate has an enormous influence on retirement savings. This is also shown by the study by PPCmetrics: According to it, Swiss pension funds achieved an average cumulative interest rate of around 25 percent between 2014 and 2023.

7. Pensioners’ share of the fund: Another important indicator is the ratio of active insured persons to pensioners in the pension fund. If a fund has a lot of pensioners, its scope for investing assets is often limited – it can invest the money in a less risky way, which generally results in a lower return in the long term. Funds with a high proportion of pensioners are often also less able to pay interest on the pension assets of active insured persons than “younger” pension funds.