More and more insured people are choosing capital instead of pensions

 

Many Swiss pension funds have cut their pensions in recent years. The reductions in conversion rates are fueling 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 results in the sum of the annual pension. For example, if the capital is 500,000 francs and the conversion rate is 6 percent, the insured person will receive a pension of 30,000 francs per year from the pension fund. However, if the pension fund lowers 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 new pension paid out from occupational pension schemes in 2022 was 1,217 francs for women and 2,077 francs per month for men. At the median, half of the pensions paid out are higher and the other half are lower than the corresponding amount.

At first glance it doesn’t seem particularly lavish. However, this does not take into account the fact that many people have their savings capital from the pension fund paid out in whole or in part when they retire. This money then does not flow into the pension. For 2022, the median amount of capital benefits paid by pension funds and vested benefits institutions was around 153,600 francs for men and 65,600 francs for women.

Take a close look at pension fund pensions

So you should pay close attention to the debate about reduced pension fund pensions. 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 opinion.

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 The median amount of savings assets withdrawn increased from 85,000 to 114,000 francs.

In order to get a more precise picture of the development of the total benefits from the occupational pension scheme, Avenir Suisse calculated how high the pension would be if no capital payments had been made. The paid out capital is allocated to hypothetical annual pensions. With an average conversion rate, the pension reduction 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 six months longer due to increasing life expectancy, the alleged significant reduction in benefits is even smaller .

Benefits to women increased

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

The pension fund study by the pension provider Swisscanto presented at the end of May also showed the growing importance of capital payments in occupational pensions. According to this, in 2022, 37 percent of insured men received their pension fund assets exclusively as capital when they retired. In 2015 it was 29 percent. For women it was 37 percent after 32 percent in 2015.

Conflicts of interest in consultations

The increased withdrawal of capital benefits from the pension fund is not without problems. It can be assumed that many pensioners will choose this because of the pension funds’ lower conversion rates. However, it is heard in financial circles that many people are not sufficiently aware that the money has to last until the end of their lives. In addition, as you get older, it becomes increasingly difficult to manage your money yourself 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 these with a regular income – primarily pensions, but also rental income, for example. Only when living expenses have been covered should you 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 receive incorrect advice. After all, some financial advisors have a vested interest in private individuals withdrawing capital from the pension fund and then letting them manage the assets.