Breakout 1: The Swiss retirement system

Transcription

1 Breakout 1: The Swiss retirement system Outlook and tips for your own retirement provision Dr. Veronica Weisser Head Swiss Macro and Sectors Analysis UBS Chief Investment Office WM

2 Section 1 Survey

3 Question 1 At what age do you expect to die? A) B) C) D) over 100 2

4 Question 2 If you were Alain Berset which single measure would you select to reform the AHV? A) Increase pension age B) Increase contributions of employers and employees C) Reduce AHV-pensions D) Increase value added tax (Mehrwertsteuer) 3

5 Question 3 When will the Swiss retirement age for men and women rise to 66? A) 2026 B) 2030 C) 2036 D) after

6 Section 2 Swiss demographics and retirement system

7 Switzerland: Population growth and aging Age groups in reference scenario (index 2015 = 100) 65 and older 64 and younger Source: BFS, UBS 6

8 Conclusion 1 The demographic changes upon us are exceptional. This is not business as usual.

9 AHV: Receipts versus pay-outs Baby boomers are (still) funding the AHV Population in 1000 people Receips and payouts per inhabitant in CHF 1000 annually Age Population 2014 Receipts per inhabitant Payouts per inhabitant 0 Source: EFD, BFS, BSV, own calculations, receipts and payouts based on 2011 data 8

10 Conclusion 2 A population structure that was ideal in the past. is anything but ideal in the future.

11 AHV financing gap In percent of GDP, base year 2011, productivity growth = 1%, real interest rate = 2% Current legislation Proposed retirement reform AV 2020 Proposal Federal Council (BR) Proposal Council of States (SR) Proposal National Council (NR) Source: EFD, BFS, BSV, own calculation 10

12 AHV and Reform 2020: Reform burden by age Additional burden over rest of life, in CHF, base year 2011, productivity growth = 1%, real interest rate = 2% Age in 2017 Source: EFD, BFS, BSV, own calculations 11

13 Wealth by generation (example canton ZH) Source: Statistisches Amt Kanton Zürich, Jahrbuch 2013

14 Material deprivation by age (I) Source: BFS (2017), Data for 2015

15 Material deprivation by age (II) Source: BFS (2017), data for 2015

16 Which way forward? Who should carry the burden? Understanding the double generational contracts Polluter-pays principle? (Verursacherprinzip) Politically feasible? or power struggles on the back of the young? 3 options: 1. taxes, contributions, retain high conversion rates young poorer 2. dampen pension growth or lower pensions all contribute 3. increase pension age living standards can be defended 15

17 Conclusion 3 The primary focus of retirement reforms is not a fair distribution of burdens.

18 Conclusion 4 Younger generations and companies will pay for previous generations' fertility and social security funding decisions.

19 2 nd pillar: Living ever longer and yet not working longer C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot 600'000 Retirement age Individual pension fund capital 500' ' ' ' ' ' '000 Conversion rate -300' Age Contributions into PF Returns on PF capital Pension Remaining PF capital including returns Source: UBS 18

20 Pension funds: Declining pensions Insured salary CHF, pension fund capital at age 50 of CHF Age Future Return on capital (BVG-Zins) 4% 0.75% ~1% Conversion rate (Umwandlungssatz) 7.2% / 5.8% 5.6 % / 4.8% ~4% Capital in PF at retirement ? Annual pension ? Monthly pension ? -40% Source: UBS 19

21 Conclusion 5 Pensions will be lower in the future. Politics can't fix this.

22 Let's take time for some Q&A

23 Section 3 Impact on companies

24 Harley Davidson Source: Getty images, UBS 23

25 Harley Davidson: Consumer behavior predictable? Demography is Destiny? "Peak demand" for Harleys at age times higher demand Sales boom 1980s to 2006 Baby boomers crossed age 45 to 49 Increased production capacities Demand disappeared, stock price fell (Belated) reaction New markets (Asia) Reduced production capacity Reduced sales volumes and margin targets Lower wages and more flexible shifts based on demand Source: Getty images, Harley Davidson, UBS 24

26 Skilled workers: Who will replace the baby boomers? Projection of missing skilled workforce Workforce joiners and leavers Migration Employment growth Difference Assumptions: Employment growth: 1,3% annually; immigration: 50`000 workers per year, entry into jobs market at age 20, exit jobs markets at age 65 Source: BfS, UBS 25

27 Career less important for older workers What is important to you in your work? 18 to 29 years 30 to 49 years 50 to 64 years Having room to work independently 29% 43% 43% High salary 9% 9% 4% Career opportunities 23% 21% 11% Able to contribute Appreciation Part-time work Source: Francois Höpflinger: "Ältere Erwerbstätige in der Schweiz im Vergleich mit jüngeren Erwerbspersonen", UBS 26

28 Reality Check! Has digitization lead to higher growth and lower employment? Economic growth in % Employment growth in % Switzerland Germany Switzerland Germany Source: Macrobond, UBS 27

29 Section 4 Your retirement planning

30 Most common retirement planning errors for CFOs 1. Pension income is frequently overestimated Note: Obligatory pension system not set up for high earners! Result: Very large gap (e.g. -60 to -80%) between last income and pension income. Often: Insufficient private savings to maintain high standard of living in retirement Tip 1: Get informed early about what you can realistically expect from the 1st and 2nd pillar Tip 2: Keep spending under control it's not what you earn, it's what you keep that provides for your retirement 2. Divorce is immensely costly for high-income individuals After a divorce your pension savings will be depleted as first and second pillar claims accrued during marriage are shared equally Tip 3: Make time for your spouse relationships are what count in life; they also count financially Tip 4: After a divorce your allowed buy-in into the second pillar ("Einkaufspotential") provides attractive tax optimization possibilities. See later comments on buying into second pillar later and how to optimize the related tax savings. 29

31 Most common retirement planning errors for CFOs 3. Concentration risk in (restricted) bulk stock holdings are often a risk to financial security in retirement Tip 5: Investigate options for a staggered withdrawal from concentrated positions, e.g. UBS Equita Yield. 4. People in management roles are often too busy to take care of their own finances Some managers transfer financial responsibility to custodians or trustees ("Treuhänder"). These custodians are often not specialized in all areas of retirement planning, resulting in blind spots and missed opportunities. Tip 6: It can be worth getting a second opinion from a retirement specialist. 5. Succession planning is often neglected, as there "is enough there for our children" But where there is a lot to be distributed, there is also a lot to be fought over the potential for family conflict is huge. Tip 7: Do your family a favor and determine yourself in as detailed a manner as possible who is to receive what. Especially if you have children you should have a marriage contract and testament and make sure these documents take into account legal limitations, e.g. statutory shares in heirship ("Pflichtteile"). 30

32 Most common retirement planning errors for CFOs 6. Room for flexibility in retirement is often given, but retirement planning is often started too late to benefit from optimizing Examples of flexibility you might have: early or partial retirement, continued work as consultant, stepping back from management or stepping out of management pension solutions (e.g. "Kaderkasse") 1. Pillar: You maybe obliged to pay substantial AHV contributions if you retire early 2. Pillar: Working part-time at the end of one's career can offer tax optimization opportunities Tip 8: Split withdrawal of pension fund capital, e.g. through stepwise retirement. Tip 9: Optimize early. An optimal solution requires many years of planning ahead due to waiting periods, increased tax benefit of regular payments into PF, impact on real estate financing and agreement sometimes required from employer for specific employment arrangement etc. Ideally individual retirement planning should be started around age 45 to 50. Tip 10: Make a budget - having an overview of your current expenses is the starting point for understanding your personal situation now and in future. How much do you really spend on what? 31

33 Most common retirement planning errors for CFOs 7. Underestimating personal life expectancy and old age care costs ("Pflegekosten") Life expectancy at birth in Switzerland is 83 years, but remember that once you have reached 65, average life expectancy is another 23 years for men and 25 for women. If you are younger than 65 today it will be even higher when you reach 65. Additionally, about half of people live longer than the average. As you have a good salary and an office job, the probability that you will be a among those living longer is high. Tip 11: Unless all of your grandparents and your parents died aged younger than 85, you should plan at least until age 95. If your grandparents already lived beyond 90, you should plan your finances to age 100 or 105. Ask your planner to take a longer view, as they often use average life expectancy. Tip 12: Today old-age care costs (average 300 CHF / day) are partially covered by Swiss health insurers and the communities ("Gemeinde"). By the time you require this care (usually around age 90 / 95), the number of people also requiring this care will have doubled to tripled and both health insurers and communities will be underfunded. If you want good care in old age you must prepare to pay for it yourself. The average time spent in care ("Pflegeheim") is 2.5 years, resulting in total costs of around CHF Again about half of people spend (many) more years in care, so consider higher amounts if you want to be comfortable in your last years, or plan to die early. Tip 13: Draw up an advance directive for future incapacity ("Vorsorgeauftrag") 32

34 Most common retirement planning errors for CFOs 8. Pension fund additional pay-ins Is your pension fund solid enough to trust them with additional funds over the next xx years until withdrawal? Waiting periods (3 years after buy-in until withdrawal; 5 years between withdrawals) frequently neglected or misunderstood Once capital has been withdrawn (e.g. for independent company, for mortgage), no more tax-privileged pay-ins possible, unless this money is repaid to the pension fund first Tip 14: Tax advantage maximized if pay-ins spread over large number of years (marginal rate) Tip 15: Opportunities if both spouses have high earnings and high buy-in potential even better tax optimization, but check first with your cantonal tax authority Tip 16: Issues around age 50: some pension funds restrict withdrawals after age 50 to the amount you had at age 50 Tip 17: Issues in case of early death: does the pension fund pay out money that you paid in additionally? Check! 33

35 Most common retirement planning errors for CFOs 9. Pension fund: withdrawal of capital versus taking pension option Taxes: generally higher if you take a pension Living long: If you have a high personal life expectancy (family longevity, female) a pension becomes more attractive Pension fund: Is your pension fund solid enough to trust them over a 40 year time period? If they have been paying conversion rates of higher than 5.5% over the past years, they will likely run into funding difficulties in future Conversion rate: high rate is personally attractive, but probably means that the pension fund will be in trouble later Family: a young spouse and young children make the pension more attractive as they would receive death benefits Tip 18: Limit the amount drawn as a pension to your minimum required monthly needs (at most) Tip 19: Stagger withdrawals of multiple 3a accounts and PF for both spouses careful of 3 and 5 year waiting periods Tip 20: Moving to a community with more attractive taxes on capital (e.g. Schwyz or Graubünden) before withdrawal can be attractive, but it must be real and maintained over several years as tax authorities check whether you have permanently moved there (water bills, shopping receipts, cash withdrawals). Mostly the previous property must be sold and cannot be rented for a few years. 34

36 Most common retirement planning errors for CFOs 10. Investments under-utilized, high share of bonds lower returns below inflation Over a 40-year horizon investment returns can make up to half of total savings. A large share of your money will only be used after age 80, let time work for you. Not a good idea: CHF bonds give practically no return while inflation is back at around 0.8%. Tip 21: 3a accounts are safer than the pension fund. Fill each 3a account only to about CHF to limit taxes later on. Tip 22: Invest mainly in stocks if your horizon is at least 10 years (also in 3a e.g. UBS Vita 100). Tip 23: Regular, automated savings in a diversified portfolio with a high share of stocks is still probably one of the best ways of investing for retirement. 35

37 Retirement planning starts early on How long will your money last? Wealth Income Pension Expenses Source: UBS 36

38 Retirement planning starts early on How long will your money last? Cash from Wealth Income Pension Expenses Investment returns Source: UBS 37

39 Long-term investment themes Emerging markets infrastructure Obesity Automation and robotics Medical devices Waste management and recycling Emerging markets health care Retirement homes Agricultural yield Mass transit rail Oncology Energy efficiency Clean air and carbon reduction Retirement planning Security & safety Education services Water scarcity Further available themes include Protein consumption, Digital data, E-commerce, Silver spending, EM tourism, Frontier markets, Middle East prosperity beyond oil, those are however not defined as sustainable themes Source: UBS CIO, October

40 Monte-Carlo simulations 39

41 Tools In CHF 40

42 Retirement planning Sometimes it is better to think about your money for an hour, than to work for it for a week. André Kostolany, financial expert Source: UBS 41

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