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SLI®-Swiss pension plan Benchmarking study 2017

SLI®- Swiss pension plan Benchmarking study 2017

ContentEditorial ............................................................................................................................................................... 4

Executive Summary .............................................................................................................................. 6

Section A: Plan design features with a comparison of contribution 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

Dear ReaderThe predominant challenges that Swiss pension funds now have to face are a constantly increasing life ex-pectancy and record low rates of return. Even though the average contributions of employees and employ-ers in occupational insurance have risen compared to the previous survey in 2015, these challenges have led to a decline in the level of benefits for the companies of the Swiss Leader Index (SLI®) presented in this study. This is now already the fifth time that we have investigated SLI pension plans. This year we have again analysed the current pension regulations for these companies and calculated the benefit entitle-ments for three selected fictitious insured persons. This allows us to compare the expected retirement benefits of the individual companies against each other and over time. The latest study shows some interesting results that deserve attention.

In this study, for the first time, we only included cash balance plans, i.e. plans where the contributions are paid into an account and accrue interest, thus forming the capital for retirement benefits. Traditional final pay defined-benefit plans were no longer offered. Apart from this common feature, however, significant differences in benefits were found among the individual pension funds. For instance, the pension benefits offered by one fund can be more than twice those offered by another. This distinctive contrast can be traced to a range of varying plan design elements which are considered in detail in the study.

The contributions show two different worlds: For some companies, pension benefits are only a minor compo-nent of the total compensation package, while for others a very good pension and high contribution rates form a basic part of the corporate culture.

Again, regarding the question of which salary compo-nents – specifically the bonus – should be included, different philosophies prevail among the various com-panies. Some believe that performance- and profit- related salary components should be considered when calculating the overall standard of living. For these companies, an adequate replacement of income in the event of retirement, death or disability needs to take into consideration the level of incentive pay as well. Others feel that performance-related remuneration is by its very nature variable, and therefore should neither be relied on by employees when planning their living standards nor be insured by companies. Our study shows that the majority of SLI companies do include the bonus as a component of the insured salary.

There are considerable differences, not only in the amount of funds allocated to the insurance compa-nies, but also in the rates of interest applied. The technical interest rate used to calculate the reserve capital ranges from 1.75% to 3%, marking a definite decline compared to the previous study of 2015 – and this with a lower dispersion. Here too there are clearly major differences between the individual company pension schemes.

Following the recent vote on Pension Reform 2020, the main focus of public debate has been on the conversion rate at age 65 which is used to calculate the retirement pension, and here too there are large differences from company to company. Currently the rates vary between 4.7% and 6.4%. It is apparent that different approach-es are being taken to manage the effects of declining investment returns and rising life expectancy, yet the trend is clear conversion rates are falling, albeit to vary-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


Editorial

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.

Overview of SMI® and SLI®

In our study, the SMI® group therefore includes:

�� ABB

�� Actelion

�� Adecco

�� Credit Suisse

�� Geberit

�� Givaudan

�� Julius Bär

�� LafargeHolcim

�� Nestlé

�� Novartis

�� Richemont

�� Roche

�� SGS

�� Swatch Group

�� Swisscom

�� Swiss Re

�� Syngenta

�� Dufry

�� UBS

�� Zurich Financial Services

The SLI® companies are those shown above plus:

�� Aryzta

�� Balôise

�� Clariant

�� Galenica

�� Kühne + Nagel

�� Lonza

�� Schindler

�� Sika

�� Sonova

�� Swiss Life

This study includes 23 of the 30 SLI® companies.


Executive Summary

Section A:

Plan design features with a comparison of contribution rates and parameters in previous studies


Section A

Pension plans in use in Switzerland fall into two main cat-egories: those where the benefit at retirement is defined under a formula typically referencing the employee’s last earned salary and years of service (defined benefit, or “DB”, plans), and those where the benefit at retirement is based on the employee’s accumulated account balance at the time (defined contribution, or “DC”, plans 1).

Figure 1 shows the relationship between pension plans with defined benefits and pension plans with defined contributions at the SLI® companies. The trend towards defined contribution plans, which has been observed for several years now, is continuing. In 2017, none of the participating companies offered its employees traditional defined benefits on retirement.

Insured salary

The pension plans covered in the study have different approaches for determining what salary is to be insured. At some companies this is the base salary only, whereas at others the definition includes the additional, variable pay (incentive pay). Some companies reduce the insured salary to coordinate with AHV/AVS, others do not. This makes it impossible to compare employee or employer contributions on the basis of total contribution percent-ages alone. Instead the calculation and thus the level of the insured salary must also be taken into account.

Further, many of the companies cover different portions of a salary within different plans. Some companies cover base salaries in one plan and bonus payments in another. Other companies set a limit for salaries to be covered in the main plan, with the part of the salary exceeding that level covered in a supplemental plan. In this study these aspects are taken into account when projecting the ex-pected retirement benefits.

1 These defined contribution plans are also called “cash balance” plans.

n Cash balance n Defined benefit

Figure 1: Types of pension plans (% of companies)

100%

80%

60%

40%

20%

0%SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017

n 100 % n proportion n none

Figure 2: Bonus included in covered salary (% of companies)

100%

80%

60%

40%

20%

0%SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017


Section A

Components of pay covered

We begin with an analysis of the components of pay that are 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 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 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 rely on nor that the company should be insuring.

Figure 2 shows that most of the companies in the study now cover variable components of salary within their pension plans. Interestingly, some companies include only a fraction of the bonus (e.g. 75% of the target bonus) as covered salary, while others make no such adjustment.

Coordination offset

In defining the covered salary, many companies apply a deduction to the total salary. The idea behind this “coordination offset” is to reduce the insured salary by an amount equal to the insured benefits already covered under Swiss social security (AHV/AVS). The Swiss social security benefit for an individual varies by pay level but is capped at CHF 28,200 (in 2017). For the legal minimum BVG/LPP benefits, the coordination offset is 7/8 of the 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.

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. Since the redefinition of minimum BVG benefits some years ago, fewer and fewer companies are applying the full AHV deduction.

Salary limits

Swiss law limits the total salary that can be covered for a single member for pension purposes to CHF 846,000 (in 2017). Companies are free to choose a lower salary limit if desired. However, as shown in Figure 4, most companies do not restrict the total covered salary much below this limit, if at all.

n 100 % AVS n 87.5 % AVS n less than 87.5 % AVS n none

Figure 3: Maximum coordination offset in base plan (% of companies)

100%

80%

60%

40%

20%

0%SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017

n Above 750k n 350k to 749k n Less than 350k

Figure 4: Limit on covered salary (% of companies)

100%

80%

60%

40%

20%

0%SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017


Section A

Employee contribution flexibility

Since 2006 it has been permissible for pension plans to of-fer employees a choice of up to three different contribution rates. This means that employees can choose how much to contribute to the plan, and benefit levels are adjusted accordingly. Where this choice is provided, plans generally allow the employee to modify his/her choice regularly (e.g. at least once per year). However, under the applicable law the company’s own contributions to the plan cannot vary.

For example, if an employee is able to choose to pay 3%, 6% or 9% of the insured salary into a plan, the company’s contribution would not vary (for example, at 15% of the insured salary). As a result, in this example the employee would receive total savings credit to their account balance of 18%, 21% or 24% of the insured salary, depending on the choice made.

This flexibility for employees can make the plan more attrac-tive as they can then adjust their contributions according to their personal circumstances, with plan benefits being adjusted accordingly. This arrangement can also be tax-ad-vantageous, as employee contributions are tax-deducti-ble for the employee. A further advantage of this design feature is that this can increase the scope for the employee to make voluntary purchases (one-off deposits with tax advantages), since a higher contribution level increases the maximum level of benefits provided under the plan.

Figure 5 shows that in 2017 more than two thirds of all SLI® companies offer a choice of employee contributions in their pension plans.

Funding of the pension funds

It is now more difficult than ever for the Swiss pension funds to meet their obligation to provide the promised ben-efits, financed by contributions from the employer and em-ployee as well as the returns on investments. Pension funds not only have to contend with the continuing low-interest environment but also poor growth prospects. Additionally, we continue to see an increased life expectancy. Typically pension funds have responded to the higher costs by re-ducing technical interest rates as well as conversion rates. Therefore the SLI® study examines these two parameters and the extent to which they have an impact on pension plan benefits.

Technical interest rates

The technical interest rate is a discount rate used to value anticipated future pension payments in the annual financial statements (“actuarial pension reserve”). Setting the technical interest rate is a challenging task, one that goes hand-in-hand with the long-term investment hori-zon for actuarial pension reserves and the difficult job of assessing future trends in investment returns. Each year on 30 September, the Swiss Chamber of Pension Fund Experts sets a technical reference interest rate, which can be adjusted upwards or downwards. This is 2% as at 30 September 2017. The underlying Guideline 4 of the Chamber of Pension Fund Experts has been known as a point of reference for a long time now and is undisputed. The Chamber of Pension Fund Experts has, however, also been working for some time on an alternative and a pos-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 Experts on 24 November 2017.

Figure 6 shows the spectrum of technical interest rates cur-rently being applied for the SLI® companies’ pension plans. 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, 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 the technical interest rate is directly linked to the pension plan’s funding ratio, since when the technical interest rate is reduced, the actuarial pension reserves increase, thus reducing the funding ratio.

n yes n no

Figure 5: Employees have contribution choice (% of companies)

100%

80%

60%

40%

20%

0%SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017


Section A

Interest on retirement savings

While technical interest rates reflect the implicit interest rate that is credited to pensioners, the retirement savings of active members explicitly accrue interest at a sepa-rate rate. The interest rate for retirement savings must be aligned partly to the minimum BVG interest rate and partly to the return earned. Ideally, the interest rates for pensioners and active members should be the same in the long term. Yet, the reality often looks quite different.

The technical interest rates for pensioners tend to be higher than the interest rates for active insured members, 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 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-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 higher (2.34%).

It is pleasing to note, however, that even with the low level of interest credit many pension funds were still able to grant interest above the BVG minimum interest rates, due to the decent returns and a relatively stable financial situa-tion. Figure 8 shows, while the minimum BVG interest rate was 1.25% in 2016, active members received an average of 1.69% for the same period, with the range of rates extend-ing from 0.75% to 2.75%, thus extending at the lower end in comparison to 2015.

n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average

Figure 6: Technical Interest Rate

4.00%

3.75%

3.50%

3.25%

3.00%

2.75%

2.50%

2.25%

2.00%

1.75%

1.50%SLI® 2013 SLI® 2015 SLI® 2017


Figure 7: Technical interest rate less interest crediting rate

2.0%

1.5%

1.0%

0.5%

0%

– 0.5%

– 1.0%

– 1.5%

– 2.0%

– 2.5%

– 3.0%SLI® 2015 SLI® 2017


Figure 8: Interest crediting rates

5.5%

4.5%

3.5%

2.5%

1.5%

0.5%2014 2015 2016


Section A

Conversion rates and lumpsum payments

There is a substantial disparity seen in the level of conver-sion rates at retirement. This is the rate at which a mem-ber’s accumulated retirement account balance is converted into a pension. This is only relevant for cash balance plans since the pension provided under a DB plan is defined in advance. Conversion rates are typically communicated in terms of the annual pension as a percentage of the total account balance; e.g. 5% means that the annual pension would be equal to 5% of the account balance the member had at the time of retirement (thus for an account balance of CHF 100,000, the annual pension would be CHF 5,000).

The conversion rate mainly factors in information about mortality rates and expected returns, allowing a simple conversion of retirement capital to a life-long pension. Swiss law requires a minimum conversion rate to apply to the legal minimum benefits. Pension funds are free to define a different conversion rate as long as at least the legal minimum benefit is provided in the end. The legal conversion rate at statutory retirement age is still 6.8%. The minimum conversion rate is currently a significant topic of discussion since among experts it is widely seen as too high, due to increases in life expectancy and lower returns on plan assets. A statutory reduction of the min-imum conversion rate was rejected by Pension Reform 2020, the Swiss referendum in September 2017.

Many Swiss pension funds are reducing their conversion rates as a result of low investment returns and the contin-uing trend of increasing life expectancy or have already done so. Figure 9 shows the current range of conversion rates currently used by SLI® companies. It shows the con-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.

There is a clear trend to ever-lower conversion rates. In 2011, conversion rates were 6.5% or higher for 50% of all participating SLI® companies. Six years later, the conver-sion rates of all companies were below 6.5%. Only 17.4% of all SLI® companies still apply a conversion rate higher than 6%. Thus, many companies have already taken measures to allow for the current actuarial and market reality.

The majority of SLI® companies apply one conversion rate to the total retirement account balances. Only one company allows for split conversion rates between the BVG mandatory and over-mandatory account balances. All conversion rates in Figures 9 and 10 relate to the conversion rates for the over- mandatory portion, if applicable.


Figure 9: Conversion rates, males, age 65 (above mandatory portion of balances)

7.50%

7.00%

6.50%

6.00%

5.50%

5.00%

4.50%SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017


Section A

Some companies have gone a step further and do not convert part of the retirement savings into a pension at all. In such cases, the non-mandatory portion is therefore paid out as a lump sum upon retirement.

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.

Survivor benefits

Pension plans are required to offer pensions to surviving spouses and dependent children upon the death of an active member. No additional lump sum death benefit is necessary. Nonetheless, all of the SLI® companies provide an additional lump sum death benefit so some degree.

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 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.

n > 6.5 % n 6.25 % to 6.49 % n 6.00 % to 6.24 %n 5.75 % to 5.99 % n 5.50 % to 5.74 % n 5.25 % to 5.49 % n 5.00 % to 5.24 % n < 5.0 %

Figure 10: Conversion rates, males, age 65 (above mandatory portion of balances) (% of companies)

100 %

80 %

60 %

40 %

20 %

0 %SLI® 2011 SLI® 2013 SLI® 2015 SLI® 2017

n Single conversion rate of total account balance

n Separate conversion rates on different account balances

n Portion of account balance restricted to lump sum benefits

9

13

1

Figure 11: Conversion rate versus lump sum options

n Account balance (sometimes reduced by value of survivor benefits)

n Percentage of account balance

n Death benefit inde-pendent of account balance

7

14

2

Figure 12: Lump sum death benefits


Section A

Section B:

Quantitative assessment of benefit and contribution levels


Section B

As a general rule, pensions in Switzerland are the largest element of compensation for employees aside from regular salary and bonus. However, it is extremely difficult to com-pare plan benefits and costs simply by reviewing the plan rules alone. The interaction of such factors as the inclusion or exclusion of variable pay, the existence or not of sup-plemental plans and the varying levels of conversion rates at retirement means that the relative worth of the different companies’ plans cannot be readily assessed. We therefore compare plans by calculating the level of benefits earned for three different fictitious employee profiles at each of the companies included.

�� Male, age 25, base salary CHF 60,000. We assume he receives no incentive pay and starts with no initial vested benefits.

�� Male, age 35, base salary CHF 120,000. We assume he has a target bonus equal to 10% of his base salary, and that he joins with initial vested benefits of CHF 60,000 (of which CHF 30,000 is the legal minimum portion).

�� Female, age 45, base salary CHF 200,000. We assume that she has a target bonus equal to 20% of her base salary, and that she joins with initial vested benefits of CHF 300,000 (of which CHF 75,000 is the legal mini-mum portion).

Details of other assumptions made when deriving the costs and level of benefits are described in the appendix.

Insured salary

We discussed in the prior section that companies have different definitions for what pay is covered for pension benefits. As a result, the insured salary will vary by individ-ual depending on his/her base pay level, bonus and some-times his/her position within the company (e.g. manage-ment vs. non-management). In Figure 13 we compare the insured salaries for the three profiles described above.

n 1st quartile n 2nd quartile n 3rd quartile n 4th quartile Average BVG Minimum

Figure 13: Insured salary (as a % of base pay)

140%

120%

100%

80%

60%

40%

20%

0%Age 25

base CHF 60,000 no bonus

Age 35base CHF 120,000bonus CHF 12,000



Section B

The wide disparity is striking. For the first profile, some companies insure only 59% of base pay while others insure 100%. This in itself doesn’t say anything about overall plan benefit levels, as the contribution percentages could be much higher in the first case than in the second. Nonethe-less, it shows why one should not simply look at contribu-tion percentages alone when comparing plans.

Equally striking for the latter two profiles is that the legal minimum insured salary level is only a small fraction of the base salary. All of the SLI® companies insure salary levels that are considerably higher.

Employee contribution rates

For all of the companies analysed, employees are asked to contribute towards the plan benefits. These contributions may vary by age or salary level. Figure 14 shows how the employee contribution rates compare for a typical career and against the legal minimum level.

Employer contributions

Employer contributions are often very difficult to compare. The statutory provisions require that they must be in ag-gregate (i.e. across all age groups) at least as high as total employee contributions. Aside from this, however, there is substantial flexibility as to how these are set for each company.

For example, a few pension plans differentiate between “regular” and “extraordinary” contributions, where regular contributions are paid each year and extraordinary contri-butions are only required in special cases, such as when a member retires early. In such a case the company’s contri-butions are relatively low at first and later increase. A similar situation occurs when extra contributions are required under a DB plan each time the employee’s salary increases. The coverage level of the pension fund may also influence contri-bution levels: in some plans, the company can benefit from 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

base CHF 60,000no bonus




Section B

Figure 15 shows this comparison for the three fictitious profiles over their assumed careers. This shows the regu-lar contributions as defined in the plan rules, but does not take into account recapitalisation contributions or contri-bution holidays.

Even where pension plans foresee only fixed contribu-tions without the extraordinary elements described above, deficits can arise because contributions may be structur-ally too low relative to the benefits provided. One example of this is providing pension conversion rates in excess of those that can be actuarially sustainable. If appropriate

adjustments to contributions are not made over time (and if investment gains are not forthcoming), pension plan funding levels will tend to deteriorate.

Changes in employee and employer contributions since 2011

Figure 16 below shows the level of plan contributions paid by the first employee profile since 2011. It can be seen that average employee contributions stayed relatively at the same level from 2011 to 2015. In 2017 they again rose slight-ly for the first time since 2011.


Figure 15: Employer contribution rate over assumed career (as a % of future base salaries)

30%

25%

20%

15%

10%

5%

0%Age 25

base CHF 60,000no bonus




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


Section B

Figure 17, as counterpart to Figure 16, shows the corre-sponding employer contributions. It is evident that they have increased in every period reviewed from 2011 to 2017. On average the employer contributions have increased by 0.6 percentage points from 9.7% in 2011 to 10.3% in 2017. This shows that the increase in employer contributions could only partly compensate for the reduction in conversion rates that took place at the same time in the same periods.

Structural underfunding of the pension plans

In Figure 18 we show a measure of the plans’ structural underfunding (“unfunded benefits”). This is the value of ben-efits expected to be provided, less the value of employee and employer contributions (including initial vested benefits brought by new hires). For younger employees, this tends to be negative (i.e. the plan makes a gain) – typically because 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 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® 2017SLI® 2015

n 1. Quartil n 2. Quartil n 3. Quartil n 4. Quartil

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

base CHF 60k no bonus

Vested benefits: none

Age 35 Malebase CHF 120kbonus CHF 12k

Vested benefits: CHF 60k

Age 45 Femalebase CHF 200kbonus CHF 40k

Vested benefits: CHF 300k


Section B

ees are more likely to stay with the company until retirement and benefit from subsidised conversion rates. There are also differences by gender – according to the BVG/LPP 2015 assumption set, females tend to have higher costs of risk benefits than males.

Most of the companies in the SLI® provide benefits that in-crease with age. Thus, older employees tend to have high-er pension costs than younger ones simply because the plans are designed that way. This may have implications for the companies’ willingness to hire or retain older workers, as the employer contributions may be significantly higher than for a younger employee at the same salary level. Further, as companies mature (i.e. the average age of their employees increases), their average costs tend to rise.

Predicted benefit at retirement

We next look to the projected level of pensions at retire-ment. Figure 19 shows the pension benefits available at retirement (age 60 and 65/64) for the same three profiles described above. Benefits at all companies substantially exceed BVG/LPP minimum levels.

These levels do not include the first-pillar benefits from AHV/AVS. It should be kept in mind that first-pillar benefits are much more significant for lower-paid members, as the maximum annual pension payable from the first pillar is CHF 28,200 (in 2017); for higher-earners, this replaces only a small portion of their overall compensation. For example, full first-pillar benefits would represent about 13% of the 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, currently age 25,

earning CHF 60,000

Retirement at 60, currently age 35,

earning CHF 120,000


earning CHF 200,000


earning CHF 60,000


earning CHF 120,000


earning CHF 200,000


Section B

Also, as seen earlier, employee contributions are not iden-tical for each company, so there is some variation in how much of the benefit has been financed by the employee versus the employer.

It is particularly surprising that benefits at age 64/65 from the most generous pension plans may be twice as high as those in the lower end of the range. This is the case both for benefits paid as a lump sum or as a pension.

This difference in benefits is particularly apparent for the first profile. If we take two individuals matching this profile, with one working at the company with the most generous pension provisions and the other at the company with the least generous, the former would retire at age 65 with pen-sion benefits of 56.5% of his last base salary (excluding AHV/AVS), and the latter with only 23.0%. The range for the other two profiles is less pronounced but nonetheless significant.

Changes in retirement benefits since 2011

Figure 20 shows the change in retirement pensions for a selected employee profile from 2011 to 2017. To improve comparability, only those companies that have taken part in all four studies (17 companies) are considered. The chart shows that the average benefits have continually declined from 2011 to 2017. This trend, however, is clearly more pronounced in 2017 and the pension benefits have signifi-cantly decreased from previous years. They are now at an all-time low of 35.6%, which represents a decline in levels by 5 percentage points compared to 2015.

The pension benefits in the above comparison from the past 6 years have fallen by an average of almost 7 percent-age points compared to our study from the year 2011 and 5 percentage point compared to the 2015 study. This is due to the reduction of conversion rates, especially in the re-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® 2017SLI® 2015


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

base CHF 60,000, no bonusvested benefits: none

Age 35base CHF 120,000, bonus CHF 12,000

vested benefits: CHF 60,000

Age 45base CHF 200,000, bonus CHF 40,000

vested benefits: CHF 300,000


Section B

The present study shows that benefits from occupational pensions are decreasing, even though the ability to retire with a decent benefit is an ever-growing concern. The low interest-rate environment with its below-average expect-ed returns and increased life expectancies are present-ing great challenges to Swiss pension funds. These are not just going to disappear overnight, nor can they be influenced by the government. It is precisely because no miracles are expected either from the market environment or from politics that the decision-makers in Swiss pension funds will have to develop new paths in order to ensure that the interests of all beneficiaries are satisfied with a sustainable design of the pension plans.

A sustainable pension plan should follow these guide-lines: the targeted level of performance can be achieved with known costs, limited redistribution, and appropriate investment risk. The main points for pension funds are already on the table:

�� Total rewards approach: the occupational pension is an important instrument of remuneration, but the expense for the employer is substantial. This makes it all the more important to align the total rewards package to the mar-ket, and maintain competitiveness. Employers can use a high weighting of the occupational pension to consciously 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.

�� Investment strategy: It is imperative to take new ap-proaches in investment strategy because of the interest- rate environment. Aside from a diversified investment strategy the selection of really successful managers is crucial. When using modern asset classes, however, it is important to remember than they require higher levels of control and governance – where there is a potential for higher reward there is always higher risk, which needs to be actively managed.

�� Governance: On the one hand, good decisions require ex-perience and expertise on the part of the decision-mak-ers, which result from increased professionalism of the pension fund managers. On the other hand, instruments are needed to quantitatively show various alternatives for action. In this way the alternatives can be appropriately assessed before the changes are applied by the Founda-tion Board.

�� Accounting: More accurate approaches to valuation in accordance with international accounting standards, such as the hotly discussed current topic of “risk sharing”, allow employers flexibility and “room to breathe” with balance sheets and income statements.

Therefore decision-makers have many tools at their dispos-al to ensure that occupational pensions are fit for the future.

Section C:

Actions to be taken


Section C

Section D:

Closing remarks


Section D

This study only covers the pension arrangements provided by each company, and ignores other elements of compen-sation. If these other elements were included, the results of the comparison might look quite different.

We are extremely grateful to all of the participating SLI® companies for their assistance with this survey.

Survey methodology

For the purposes of this study, we have looked only at those plan benefits that are available to new hires at each company. Special benefits (or “grandfathering”) for exist-ing groups were not considered.

In order to review the cost and value of benefits, we have made a number of assumptions. Key among these are the following:

�� Salary increases of 1.75% per year

�� Interest credits in cash balance plans of 2.25% per year

�� BVG 2015 turnover, disability, and generational mortality rates

�� Retirements would be from age 60 at the rate of 10% per year until latest age 65/64 (men/women)

�� Members are assumed to prefer a pension at retirement to a lump sum if such a choice is available

�� Members contribute at the “standard” or “default” rate as defined by each plan if such a choice is available

�� 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.

Confidentiality

Information on individual companies’ plans is held strictly confidential.

Disclaimer

This report was prepared as a summary of Willis Towers Watson’s research. Unless otherwise specifically agreed in writing we assume no responsibility, duty of care or liability to those who may gain access to a copy of this document and any such reliance that they place on it is entirely at their own risk.

This report does not purport to be and is not a substitute for specific professional advice. Specific advice should be taken on the circumstances in question before any action is taken.

Further information

If you would like further information, please contact

Daniel Blatter +41 43 488-4407 [email protected]

Eileen Long +41 43 488-4491 [email protected]


Section D

Copyright © 2017 Willis Towers Watson. All rights reserved. WTW-WE-CH-0008 November 2017

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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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