The Crux is in the Detail

Transcription

1 Aon Business Unit Market or Division Practice Group The Crux is in the Detail Issue 3 l August 2017 In this Issue 01 Example 1: Effects on compulsory BVG/LPP coverage for a lower earner 02 Example 2: Effects on compulsory BVG/LPP coverage for a higher earner 02 Analysis of the impacts on an actual pension fund membership 03 Retirement Transitional rule for women s retirement age and consequent options 04 What needs to be done? Practical examples to illustrate the Pension Reform 2020 The Pension Reform 2020 ( AV/PV2020 ) is on the doorstep with the popular vote/referendum on whether to accept the reform proposals occuring on 24 September The key items of the reform are common knowledge and are easy to explain by straightforward examples. But, as usual, the devil is in the detail and in our daily practice we have already been confronted with many interesting questions. Accordingly, we thought it helpful to highlight the challenges coming from the AV/PV2020 with the help of a few examples. Two practical examples (low salary, high salary) will show the changes in compulsory benefits coverage ( BVG/LPP ). Another example will be used to illustrate the transitional provisions in the 1st and 2nd pillars. However, the overall effects of the AV/PV2020 may differ considerably from one pension plan to another: the more the plan s contributions and benefits exceed the minimum BVG/ LPP contributions and benefits, the less significant will be the need for adjustment following the entry into force of the AV/PV2020. Example 1: Effects on compulsory BVG/LPP coverage for a lower earner The BVG/LPP entry threshold, i.e. the salary threshold over which employees must be insured, remains the same at CHF 21,150 and thus there are no new groups of insured members. However, the co-ordination deduction will change to equal 40% of the salary, subject to a minimum of CHF 14,100 and a maximum of CHF 21,150. The effects are clearly visible taking the example of an employee who earns the minimum BVG/LPP salary, namely CHF 21,150 per year. The main figures under current BVG/LPP rules and under the AV/PV2020 rules are compared in the following table. Age 45, salary CHF 21,150 Current BVG/LPP AV/PV2020 Co-ordination deduction Pensionable salary = 21, Retirement credit 15% = % = Accrued retirement savings capital Expected retirement savings capital at Expected retirement pension 6.8% = % = Art. 8(1) BVG/LPP 2 Art. 8(2) BVG/LPP if the co-ordinated salary is less than CHF 3,525 per year, it shall be rounded up to that amount.

2 Due to the lower co-ordination deduction, the pensionable salary is doubled and the annual retirement credits increase accordingly. Assuming that the AV/PV2020 is implemented and the member has an accrued retirement savings capital of CHF 5,993, the projection leads to an expected retirement pension of CHF 1,798. In this example, the conversion rate reduction from 6.8% to 6.0% is more than compensated by the increase in pensionable salary. We advise pension funds of companies with relatively low salary levels or a high proportion of part-time employees to carefully analyse these effects individually, for both their members (salary deductions and benefits) and the employer (costs). Example 2: Effects on compulsory BVG/LPP coverage for a higher earner The picture is quite different if we consider the effects on members in the higher salary bracket. Our example assumes a 52 year-old employee with an annual salary of CHF 120,000. The same figures as above are presented in the table below: Age 52, salary CHF 120,000 Current BVG/LPP AV/PV2020 Co-ordination deduction (= max. deduction) Pensionable salary = = Retirement credit 15% = % = Accrued retirement savings capital Expected retirement savings capital at Expected retirement pension 6.8% = % = In this case too, the member s pensionable salary increases, albeit by less than in the first example. The retirement savings credits and therefore the expected retirement savings capital at age 65 increase accordingly (assuming that the AV/PV2020 is implemented and that the member has an accrued retirement savings capital of CHF 164,794). However, in this case, the increase is not sufficient to compensate the lower conversion rate. In this example, the higher contributions in the last 13 years no longer suffice, and the member s retirement pension will be about 9% lower. In this case, the vested rights guarantee would apply and the member would be entitled to a retirement pension equal to the BVG/LPP minimum under today s rules of CHF 20,375. Analysis of the impacts on an actual pension fund membership The above two examples show that whether a member will be among the winners or the losers of the AV/PV2020 reform depends to a great extent on his or her age and salary. This is why Aon Switzerland is currently assisting companies to understand, in a simple and transparent way, how the reform will affect their actual employee population in practice. In the chart below we show, for a sample membership group, how relevant the changes resulting from the AV/PV2020 will be. The Crux is in the Detail Aon Hewitt August

3 Graph: Comparison of level of retirement credits by salary level (where the current BVG/LPP is standardized at 100). With regard to the actual membership of Pension Fund Y, the diagram shows that some members will no longer reach the new minimum retirement credits once AV/ PV2020 is implemented. In this specific case, it might be worth considering an adjustment in the pension plan, at least for members earning less than CHF 40,000 per year. The blue line shows the level of retirement credits (standardized at 100) above the BVG/LPP entry threshold of CHF 21,150. The red curve depicts the new level of retirement credits after implementation of the AV/ PV2020. The graph shows that for low salaries, the minimum retirement credit amounts will rise sharply as a result of the reduced co-ordination deduction. We can also compare today s BVG/LPP and the new minimum BVG/LPP under AV/PV2020 on a theoretical basis with the actual membership and pension plan of Pension Fund Y. Each green dot represents the regulatory benefits of an individual member of the Pension Fund. It is clear that in the Fund some members are in a salary bracket (below CHF 40,000) which will no longer enable them to attain the minimum level of contributions required to fund the compulsory savings after AV/PV2020. Therefore, in this specific pension fund, changes could be appropriate post-av/pv2020, at least with regard to the lower income bracket. In other cases where pension plans provide substantial extra-mandatory benefits, only the shadow account for BVG/LPP compulsory coverage on the benefit certificate will need to be adjusted because all members are already well above the AV/PV2020 level under the current plan. Retirement Transitional rule for women s retirement age and consequent options In the next example, we consider the case of Ms X and the effects of the AV/PV2020 reform on her retirement terms. Ms X is insured under compulsory BVG/LPP coverage, she was born in February 1956 and is married. She will turn 64, the normal retirement age under current law, at the end of February 2020 and would then take normal retirement. However, under the AV/PV2020, the normal retirement age, or the reference age as it will be called 3, will be raised for women from 64 to 65 in four steps. In other words, as of 1 January 2018, the reference age for women is 64 years and 3 months, and will then be increased by 3 months a year to reach the reference age of 65 on 1 January As a result, if the AV/PV2020 pension reform is accepted, Ms X will first reach the legal retirement age in November This means she will have to work nine months longer to reach normal retirement age. 3 AV/PV2020-AVHG/LAVS Art. 21(1) 4 AV/PV2020-AHVG/LAVS transitional provisions lit. c The Crux is in the Detail Aon Hewitt August

4 Ms X will also be affected, albeit not to the full extent, by the reduction in conversion rate. The conversion rate will be reduced in four annual steps of 0.2% each 5, starting on 1 January 2019 (one year after the first step of the phase-in of the increase in the reference retirement age for women). So when Ms X retires at the age of 64 years and 9 months, the applicable conversion rate will be 6.46%. However, she will be able to count on at least the minimum pension from her pension fund in accordance with the current BVG/LPP minimum 6. As of 1 January 2019, Ms X will benefit from a higher pensionable salary given the new co-ordination deduction 7. For her age group, there will be no increase in retirement credits (effective from 2019) and her AHV/AVS contributions will remain unchanged (since this increase is first applicable in 2021). With regard to AHV/AVS benefits, however, Ms X will still be entitled to the CHF 70 increase in monthly retirement pension 8. Moreover, if both she and her husband draw a full AHV/AVS pension, they will benefit from the higher cap on married couples pensions, which will be raised to 155% from currently 150% (as of 2019) 9. Depending on her preferences, Ms X will have to decide whether or not early retirement under current regulations would be the better solution for her. What needs to be done? It is clear from the above examples that individual cases will be more or less complex - especially if members reach retirement age during the period of the transitional provisions. Pension funds would therefore be well-advised to examine the details so as to be able to respond correctly in specific cases. Moreover, pension funds should examine on a timely basis whether, given the specificities of their membership, plan adjustments are necessary or only the shadow account for BVG/LPP compulsory coverage needs to be adjusted. In cases where there are only a few members affected by the change in the minimum benefits under the AV/PV2020, alternative approaches, such as adjustments in reserving policy, are conceivable. Fundamental changes need to be implemented by the end of the provisions of the AV/PV2020 on the coordination deduction and minimum BVG/LPP retirement credits will not enter into effect until 1 January 2019 and the first stage of the reduction in the conversion rate will also begin at that time. By 1 January 2018, pension regulations will need to be adapted for the following points: ideally, the term normal retirement age will be replaced by reference age ; in 2018, the statutory reference age for women will be 64 years and 3 months and will increase by 3 months each year until 1 January Moreover, the conversion rate for women at the corresponding reference age during this transition period will need to be determined. all occupational benefits institutions must offer early retirement from age 62. Occupational benefits institutions may deviate from this rule, but the minimum retirement age must not be more than 5 years below the regulatory reference age, and must be at least age 60. Exceptions will be permitted, particularly in the event of company restructuring; if the existing regulations provide for early retirement between ages 58 and 60, this option may be continued until 31 December 2022 for existing members of the pension fund at 31 December 2017; the payment of retirement benefits may be deferred for up to five years after the reference age, provided that the member continues to be gainfully employed; all occupational benefits institutions must allow members to take partial retirement; all occupational benefits institutions will have to offer the possibility of maintaining insurance in cases where the employer terminates employment after age 58, or from age 55 if the occupational benefits institution avails itself of this option. Contact us - we can help you to find solutions. 5 AV/PV2020 BVG/LPP Art. 14(2) in conjunction with transitional provision lit. b 6 AV/PV2020 AHVG/LAVS transitional provisions lit. c 7 AV/PV2020 BVG/LPP Art. 8 8 AV/PV2020-AHVG/LAVS Art. 34a in conjunction with transitional provisions lit. d 9 AV/PV2020-AHVG/LAVS Art. 35 in conjunction with transitional provisions lit. e The Crux is in the Detail Aon Hewitt August

5 Key Contacts Aon Suisse SA Avenue Edouard-Dubois Neuchâtel Aon Suisse SA Avenue Edouard Rod 4 Case postale Nyon 1 Aon Schweiz AG Lagerstrasse Zürich +41 (0) swissnews@aonhewitt.com aon.ch About Aon Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance. Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. GDM000000