General conclusions November Pension Fund Survey Pension plan benefits and their financing

Transcription

1 General conclusions November 2009 Pension Fund Survey Pension plan benefits and their financing

2 Executive Summary This Survey covers benefits provided by Swiss pension funds and how they are financed based on a standard questionnaire and the regulations of participating pension plans. The current Survey was conducted between June and August A total of 68 autonomous and semi-autonomous pension funds with.2 million members and accrued pension assets of CHF 257 billion participated in the Survey. The Survey is representative for large and medium-sized pension funds and may be used as a general guideline and benchmark for smaller pension funds. Compared with the last survey, the share of participating pension funds with defined contribution plans increased from 72% to 74%. 83% of those pension funds apply a retirement credit scale graduated by age. Individual annual retirement credits ranges from 5% of pensionable salary for pension funds insuring the full AVS/AHV salary, to 36% for pension funds with a higher salary coordination. Calculated over a full working career, retirement credits averaged 6.6% of the pensionable salary, with the employer contributing 9.8%. Employers finance 59% of the retirement credits on average within a range of 5 to 7 and higher. These figures show the unusually wide dispersion of occupational benefits among Swiss pension funds. In 2009, the great majority of defined contribution plans offered active members a conversion rate of a minimum of 6.8% at age 65. The trend towards lower conversion rates is more pronounced than it was in the last survey. Moreover, the figures show that many pension funds are reducing their conversion rates progressively over a transitional period. Under the golden rule assumption (growth in salary = interest on retirement savings capital), half of the participating defined contribution plans paid retirement pensions of 36% to 46% of pensionable salary. In the past, the interest credited on the retirement savings capital has generally been higher than the growth in salary, therefore retirement pensions would generally be higher. The share of pension funds with defined benefit plans fell from 28% to 26% in the current Survey compared with the survey two years ago. The shift towards defined contribution plans is thus a continuous trend and is not expected to change. A great majority of pension funds with defined benefit plans continue to target retirement benefits in the range of 6 to 72% of pensionable salary after 37 to 40 insured years. 78% of the defined benefit plans finance the benefit promises with a uniform employee contribution averaging 8.5% of the pensionable salary for all age groups (flat-rate scale). Employer contributions vary between 7% and 7% and are % on average. 67% of the surveyed pension funds were underfunded on 3 December More than half of these pension funds expect future investment returns to be sufficient to finance their recovery. In 64% of those defined contribution plans, the interest rate credited on the retirement savings capital in 2009 was below the LPP/BVG minimum rate. 7% also reduced the interest rate credited on the LPP/BVG retirement savings capital. One quarter of the underfunded pension funds had the benefit of one-time contributions from employers or employer foundations and one sixth pledged employer contribution reserves. Remedial contributions were approved by only 2% of the pension funds, and only 2% decided to levy remedial contributions from pensioners. In comparison to the last survey, there have been limited changes in the main trends in occupational pension benefits. Participating pension funds still regard investment risks as being the greatest threat, followed by the increasing life expectancy of pensioners. Far fewer participating pension funds were concerned about the risk of an increase in disability cases although, with the economic recession, the number of disability cases is expected to increase in the near future. Pension funds continue to make growing use of employee choice in benefit options within the legal framework for active members. This applies in particular to the prefinancing of the benefit reductions in case of early retirement and to choice in the level of employee contributions. The choice of individual investment strategies for noncompulsory benefits has declined considerably due to the provisions of the Law on Vesting in Pension Plans (Article 7 LFLP/FZG) which remain restrictive. Hewitt Associates SA i Pension Fund Survey 2009

3 Contents Introduction 2 Participating Pension Funds 2 3 Defined Contribution Plans 3 4 Defined Benefit Plans 5 Funded Status and Remedial Measures 7 6 Trends in Occupational Pension Plans 2 7 General Comments on Defined Benefit and Defined Contribution Plans 30 8 About Boxplot Diagrams 32 9 Participating Organisations 33 0 Customised Benchmark Studies 34 Hewitt Associates SA ii Pension Fund Survey 2009

4 Introduction The 2009 Pension Fund Survey is the fourth survey comparing benefits offered by Swiss pension plans and how they are financed based on a standard questionnaire and the regulations of the participating pension funds. Hewitt conducted its first Pension Fund Survey in A total of 44 pension funds participated in that Survey. In 2005 and 2007, the number of participating pension funds increased to 87 and 26 respectively. Due to the difficult economic situation, several pension funds decided not to participate in the 2009 Survey because of time constraints and other more immediate priorities. The number of participating pension funds has therefore decreased to 68. The pension plans participating in this Survey represent.2 million members and aggregate pension assets of CHF 257 billion. The pension funds are all autonomous or semi-autonomous and insure members employed with the following categories of companies: Large national companies and important regional employers; Large international companies headquartered in Switzerland; and Swiss subsidiaries of large multinationals headquartered abroad. The conclusions of this Report are based mainly on information drawn from the regulations of participating pension funds. Only base plans were considered in the Survey. Some of the data (Number of active members and pensioners, funded status, questions on trends and developments) was collected by means of a questionnaire completed by participants. To highlight results, the information is presented in the form of graphs, tables or box-plot diagrams showing data distribution and dispersion (see explanation on page 3 of this Report). Several trends were identified in different areas. The Report is primarily a snapshot of current practices in mid Hewitt Associates SA Pensionskassenumfrage 2009

5 2 Participating Pension Funds The tables below show the breakdown of participating pension funds: Participating pension funds Pension Fund Survey Number of pension funds Pension assets (CHF billions) Active members 784, ,560 Pensioners 393,59 405,69 Participating pension funds by size Number of funds Number of members Up to ,599 % % 22,779 3% % 38,09 5% % 82,997 % over , ,067 0 Note: Information is missing for two pension funds that did not indicate their total membership. Participating pension funds by type of pension plan design (defined benefit or defined contribution) Design Pension funds Members Defined contribution plans 74% 72% 65% 57% 58% 48% Defined benefit plans 26% 28% 35% 43% 42% 52% Participating pension funds by industry Industry Pension funds Members Finance 8% 3% Industry/automobiles/machines 8% 8% Trade/consumer goods 2% 6% IT/telecommunications 5% 4% Chemicals/pharmaceuticals/ med. equipment 6% 2% Public sector 4% 48% Other 27% 9% Hewitt Associates SA 2 Pension Fund Survey 2009

6 3 Defined Contribution Plans General Definition In defined contribution plans, retirement benefits depend on the pensionable salary, regulatory retirement credits, voluntary contributions, the interest rate credited to accrued retirement savings capital during the employee s career as an active member and the applicable conversion rate at retirement. Death and disability benefits depend on the pensionable salary (benefit-based risk benefits) or on the accrued retirement savings capital, future retirement credits, interest, if any, credited on accrued retirement savings capital and the applicable conversion rate (contribution-based risk benefits). Increasing proportion of defined contribution plans In 24 of the participating pension funds, retirement benefits are defined contribution in nature. This represents 74% of participating pension funds compared with 72% in the last survey two years ago. The proportion of defined contribution plans has thus increased further since the last survey. Pensionable salary One in five participating defined contribution pension funds insure the full base salary (see table below). Most of the pension funds with no coordination offset compensate by setting lower savings contributions as a percentage of pensionable salary. apply the LPP/BVG coordination deduction (2009: CHF 23,940). Nearly a quarter of the surveyed defined benefit plans define the coordination deduction as a percentage of the base salary. This generally favours employees in the lower salary brackets. Moreover, many pension funds define their coordination deduction using a combination of parameters in which the percentage rate is capped by a maximum coordination deduction (e.g. 4 of salary but not more than 7/8ths of the maximum AVS/AHV pension). Coordination deduction in defined contribution plans Number of pension funds no deduction minimum AVS/AHV pension 9% 3% 7/8 of maximum AVS/AHV pension 24% maximum AVS/AHV pension 7% in % of base salary 23% 9% other definition 22% 34% Retirement benefits In defined contribution plans, retirement benefits depend on three main factors: the sum of the nominal retirement credits during the period of active membership; the interest earned on accumulated retirement credits (= retirement savings capital); and the applicable conversion rate at retirement. The sum of retirement credits and current conversion rates are analysed individually for all the surveyed pension funds below. Thereafter, the expected retirement benefits are calculated for the relevant pension plans on the basis of assumed future interest credits. Retirement credits The sum of retirement credits is the first element determining the retirement benefits in a defined contribution plan. Based on the 2009 survey data, the median retirement credit for participating pension funds was 6.6% of the pensionable salary. The average employee contribution was 6.8% and the average employer contribution 9.8%. Risk contributions are not included in those rates. The median retirement credit for each individual pension fund ranges from to 28% of pensionable salary (see graph below) confirming the wide range of practice in defining occupational pension benefits. The span between the lowest and the highest retirement credit ranges from 4.7% to 36.5%. Hewitt Associates SA 3 Pension Fund Survey 2009

7 The low end of the contribution ranges is nominally below the lowest LPP/BVG retirement credit of 7% and is only used by pension funds insuring the full AVS/AHV salary. Retirement credits - average value and range in % of pensionable salary 4 35% 3 25% 5% 5% Pension fund Note: The bold dots show the average value (median) of the retirement credits in the individual pension funds. The lines show the difference between the highest and lowest retirement credit in the individual pension funds. Retirement credit scales The range of retirement credits shows that only 7% of those surveyed with defined contribution plans apply uniform retirement credits over a member s career. Most pension funds apply a retirement credit scale graduated by age in accordance with LPP/BVG minimum provisions. Ratio of highest to lowest retirement credits 4 35% 36% 35% 34% Proportion of pension funds 3 25% 5% 5% 7%7% 8% 5% 7% 4% 27% 25% 24% 6% 5% 4% 3% % % 2% % Ratio PFS 2005 PFS 2007 PFS 2009 In an LPP/BVG minimum pension plan, the highest retirement credit is 257% higher than the lowest (8% : 7%). In 42% of the surveyed defined contribution plans, the highest retirement credit was at least 225% higher than the lowest (see above graph). These pension funds therefore have a steeply graded contribution scale whereby older active members are required to pay significantly higher contributions than younger members. If these contributions are paid by the employer, retirement benefits for older members will be costly for the employer. 42% of participating pension funds have a flat grading scale with a ratio of 25% to 224% between the highest and lowest retirement credits. These figures have varied little in comparison to the two prior surveys. Hewitt Associates SA 4 Pension Fund Survey 2009

8 Total retirement credits Retirement benefits depend essentially on the total retirement credits accrued over a member s active years of service. The highest total retirement credits in the period between the first possible date of entry and retirement at age 62 amounted to 87% and the lowest to 297%. For half of the participating funds, the total lies between 483% (lowest quartile) and 632% (top quartile) and is therefore above the total LPP/BVG retirement savings credits of 446% at age 62. Compared with the last survey, total retirement credits were slightly higher, but the overall picture remains more or less the same. Total retirement credits to age 62 in % of pensionable salary PFS 2007 PFS 2009 The situation is consistent when the analysis is based on retirement at age 65 (see below diagram). The minimum LPP/BVG plan produces total retirement credits of 50 at age 65. The average of the surveyed funds increases by between 5 and 55% if retirement is three years later at age 65 instead of 62. The pension funds which lie below the LPP/BVG total retirement credits are again those insuring the full or nearly the full AVS/AHV annual salary. Overview of total retirement credits at ages 62 and 65 PFS 2007 PFS 2009 Average total retirement credits at age 62 55% 56% Average total retirement credits at age % 66% Employer's share of retirement credits Retirement credits are financed by employer and employee contributions. On average, the employer contributes 59% of the total retirement credits, which is slightly more than two years ago. 37% of the employers pay between 5 and 54%, while 59% pay between 55% and 69%. The employer pays 7 or more of the retirement credits in only 4% of the surveyed pension funds. This percentage has decreased significantly since the previous survey. Hewitt Associates SA 5 Pension Fund Survey 2009

9 Employer's share of contributions to age 65 Proportion of pension funds 4 35% 3 25% 5% 5% 37% 27% 5% 6% 4% 50-54% 55-59% 60-64% 65-69% 7 and + Employer's share Employee contributions The employees, for their part, pay on average 4% of the retirement credits. Unlike defined benefit plans, in defined contribution plans employee contributions generally increase by age (7% of participating plans; see diagram below). 46% of the pension funds have a very gradual grading of employee contributions; as many as 26% apply a steeply graded scale. These pension funds are assuming that members prefer to pay relatively low contributions when they are young and need money for raising a family or buying a home whereas, as they grow older, they will be increasingly willing to contribute to their retirement savings. Ratio of highest to lowest employee contributions Proportion of pension funds 3 25% 5% 5% 29% 5% 3% 3% 5% 8% 7% % Graduation rate Conversion rates The conversion rates at retirement date are the third factor determining the retirement benefits in a defined contribution plan. Basically, the two key components of the conversion rate are a member s life expectancy at his effective retirement age, and that of his beneficiaries (spouse, partner and children, etc.) upon the member's death after retirement, and the actuarial discount rate. In 2009, the conversion rates for the LPP/BVG minimum benefits are 7% for women at age 64 and 7.05% for men at age 65. Under current legislation, these conversion rates have to be lowered to 6.8% for women at age 64 and men at age 65 by 204. On 7 March 200, Swiss citizens will vote on a referendum to further lower the conversion rate to 6.4% for both genders at age 65. In 2009, 2% of participating defined contribution plans apply conversion rates of 7.05% or higher at age 65 and are therefore in line with the applicable minimum conversion rate for men (see diagram below). The highest conversion rate is an astonishing 8.4%. Many pension funds indicated that they intend to continue lowering their conversion rates in coming years and have already taken steps to amend their plan rules accordingly. Hewitt Associates SA 6 Pension Fund Survey 2009

10 Conversion rate at age 65 (PFS 2009) 4.5 Actuarial discount rate Conversion rate Note: Conversion rates were rounded to the nearest 0.05% and presented on the basis of the actuarial discount rate. 6% of the surveyed defined contribution plans already apply the future LPP/BVG minimum conversion rate of 6.8% in 2009 while only 9% indicated that they apply a conversion rate of 6.4% or lower. These conversion rates are generally lower in comparison to the 2007 survey, confirming the ongoing trend towards lower conversion rates. Proportion of pension funds Actuarial discount rate (pensioners) in defined contribution plans 45% 4 35% 3 25% 5% 5% % 6% 4% % 45% 2% 4 % 2.75% % 3.38% % Actuarial discount rate Furthermore, 4% of the surveyed pension funds continue to calculate pensioners actuarial liabilities with an actuarial discount rate of 4% or higher (see diagram above). Assuming a spouse s pension of 6 of the retirement benefit and a child s pension of, and based on LPP/BVG 2005 mortality tables and an assumed discount rate of 4%, the average conversion rate for men and women at age 65 is 7.05%. This means that every fifth pension fund with an actuarial discount rate of 4% is over the threshold value and must either provide lower death benefits or incur actuarial losses at retirement since the required capital for new pensioners is higher than accrued retirement savings capital. About one quarter of the pension funds with a 4% actuarial discount rate have conversion rates below this threshold value. 45% of the surveyed pension funds apply an actuarial discount rate of 3.5%. For these funds, the actuarial value of the conversion rate is 6.7% (assuming a spouse s pension of 6 of the retirement benefit and a child s pension of ). About one sixth of the surveyed pension funds insure lower death Hewitt Associates SA 7 Pension Fund Survey 2009

11 benefits or generate actuarial losses at retirement while slightly less than one quarter have conversion rates below the threshold. Projected retirement benefits As previously mentioned, in a defined contribution plan, a member s retirement benefits depend on the total retirement credits accrued during his active membership, the interest earned on his retirement savings capital and the applicable conversion rate at his retirement. Since the interest earned on the retirement savings capital in the future is unknown, the projected retirement benefits are calculated based on the golden rule. This rule assumes that the annual growth in salary is equal to the annual interest rate credited to the retirement savings capital whereby the net interest earnings are nil. When LPP/BVG compulsory coverage was introduced in 985, the intention was for the replacement income after retirement at age 65 together with the AVS/AHV first pillar benefit to equal about 6 of last salary. The occupational pension benefits target was basically 36%. In accordance with the LPP/BVG revision, the upper limit for regulatory retirement benefits has been set at 7 of last AVS/AHV pensionable annual salary or, for salaries exceeding the LPP/BVG ceiling, at 85% of last AVS/AHV salary, including social security. Projected retirement benefits at age in % of pensionable salary PFS 2005 PFS 2007 PFS 2009 Note: Projected retirement pensions were calculated based on total retirement credits and the current conversion rate. The projection is based on the golden rule, i.e. the annual growth in salary is exactly equal to the annual interest rate credited to the retirement savings capital (net interest = ). Under the golden rule assumption, half of the defined contribution plans surveyed in 2009 provide retirement benefits between 36% and 46% of the pensionable salary (which for 8 of participating funds, is lower than the AVS/AHV salary: see the section on the coordination deduction). The most generous pension fund thus targets retirement benefits of 62% of the pensionable salary while the least generous only targets 24%. Under the golden rule assumption and with a conversion rate of 7.05%, the LPP/BVG minimum targets a replacement income of 35.3% for men at age 65 (or 34% based on a conversion rate of 6.8%). If the interest credited on retirement savings capital is in actual fact higher than the growth in salary as was usually the case in the past the retirement pension expressed as a percentage of the pensionable salary will be higher. This shows that the amount of retirement benefits varies widely from one pension fund to another (see diagram above). The most generous pension fund offers retirement benefits over two and a half times greater than the least generous. The large majority of participating pension funds offers retirement benefits which are significantly higher than the minimum legal benefits. Again, the pension funds under the LPP/BVG minimum value are those insuring the full or nearly the full AVS/AHV salary. There has been no significant change in this regard since the last two surveys in 2005 and Hewitt Associates SA 8 Pension Fund Survey 2009

12 Effects of early retirement In case of early retirement, the retirement pension is cut back to reflect the shorter contribution period and the fact that pension payments are expected to continue for a longer period. The corresponding reduction varies from 4% to 8.4% (see following table). The more generous pension plans make significantly smaller reductions than the less generous. Clearly, generous pension funds are more willing to subsidise early retirement and to assume the greater likelihood of an actuarial loss, which has to be borne by the entire membership. Projected retirement pension at age 65 PFS 2009 PFS 2009 Retirement age 62 Retirement age 65 Difference Maximum (0) 53.6% 62.3% -4. Upper quartile (75%) 39.9% 46.2% -3.7% Median (5) 36.2% 4.3% -2.5% Lower quartile (25%) 30.5% 36.3% -6. Minimum () 9.2% 23.5% -8.4% Note: All calculations were made based on the golden rule assumption (net interest = ) and current conversion rates. Risk benefits In addition to retirement benefits, under the Swiss Constitution pension funds are required to insure mandatory death and disability benefits. The minimum benefits are defined in the LPP/BVG. 6% of the surveyed defined contribution plans define their risk benefits as a percentage of the pensionable salary. 3% insure risk benefits on a defined contribution basis. This means that, in case of death or disability, the accrued retirement savings capital is incremented by future contributions and, depending on plan rules, projected with interest to the normal retirement age and then converted into a temporary or a lifelong disability pension by means of a conversion rate. As a rule, survivor benefits are defined as a percentage of the disability benefit. 8% of the surveyed pension funds define their risk benefits using a mixed definition, or other criteria. Insured disability benefits The highest disability pension is 64% of uncoordinated base salary and the lowest 25%, again underscoring the large dispersion in the level of insured pension benefits. Half the surveyed pension funds insure a disability pension varying between 4 and 49.5% of the base salary (see graph). These figures do not vary significantly from the prior survey. Disability benefit in defined contribution plans in % of base salary PFS 2005 PFS 2007 PFS 2009 Hewitt Associates SA 9 Pension Fund Survey 2009

13 Insured survivors benefits Approximately 9 of the defined contribution plans offer insured spouse s or registered partner s pensions in the range of 6 to 7 of the insured disability pension. As a percentage of pensionable salary, the pension is between 4 and 55% for half of the pension funds. 79% of the surveyed defined contribution plans grant survivor benefits to domestic partners. Most pension funds insure a child s pension of between 2% and 6%. One pension fund has no child s pension. Registered pension funds are actually not permitted to do that since the minimum LPP/BVG child s pension is in any event guaranteed. Survivor pension in defined contribution plans PFS 2009 PFS 2009 Spouse s pension Children's pensions Maximum (0) 73.6% 23.9% Upper quartile (75%) % Median (5) 46.7% 4.4% Lower quartile (25%) 39.9% 2.2% Minimum () 24.4% 0. Note: Survivors pensions are expressed as a percentage of pensionable salary. Hewitt Associates SA 0 Pension Fund Survey 2009

14 4 Defined Benefit Plans General Definition In defined benefit plans, retirement benefits are defined as a percentage of salary. The retirement benefit depends on the annual accruals (e.g..75% of the pensionable salary per year of service) and the completed years of pensionable service before retirement. Benefits are adjusted for salary increases and such adjustments are generally fully financed. Depending on plan rules, the adjustments will be financed by the employer, the member or both. Death and disability risk benefits are generally defined as a percentage of the pensionable salary (defined benefit risk benefits). Declining number of pension funds with a defined benefit structure 44 of the participating pension funds are defined benefit by design. This represents 26% of the participating pension funds compared with 28% in the 2007 survey and no less than 35% in the 2005 survey. The proportion of defined benefit plans thus continues to decline a trend which is not likely over yet. Pensionable salary Only 5% of the surveyed defined benefit plans insure the full AVS/AHV salary. Over half the pension funds define their coordination deduction on the basis of several different parameters; in addition to the percentage rate, most define a maximum coordination deduction (e.g. 4 of salary but not more than 7/8ths of the maximum AVS/AHV pension) or a fixed CHF deduction. Only one quarter applies the AVS/AHV maximum pension or the LPP/BVG coordination deduction (2009: CHF 23,940). One sixth of the surveyed defined benefit plans define the coordination deduction as a percentage of base salary. Coordination deduction in defined benefit plans Pension fund share no deduction 5% 5% maximum AVS/AHV pension 8% 25% 7/8 of maximum AVS/AHV pension 3% 7% minimum AVS/AHV pension 5% 2% in % of base salary 5% 9% other definition 55% 53% Most pension funds calculate the retirement pension based on last pensionable salary (see graph below). About one third use the average annual salary in the last years before retirement. Only 2% of the surveyed pension funds base their calculations on the career average. Base salary for pension 30.23% 2.33% 67.44% Career average Last pensionable salary Average before retirement Hewitt Associates SA Pension Fund Survey 2009

15 Retirement benefits A member s retirement benefits depend on two other factors in addition to the pensionable salary: the annual accruals (e.g..75% of the pensionable salary per year of service), and the completed years of pensionable service at retirement. The maximum accruals at normal retirement age, the annual accrual rates and the financing of benefit promises of the surveyed defined benefit plans are analysed below. Maximum accruals (target retirement benefit) The target retirement benefit in a defined benefit plan is defined as a maximum accrual in percentage of the pensionable salary at normal retirement age after attaining a defined maximum number of years of pensionable service. 72% of defined benefit plans have target benefits of 6 to 72% of pensionable salary after 37 to 40 years of pensionable service. On average, 38.8 years of pensionable service are required to attain the maximum retirement benefit. Maximum target benefit Target benefit Insurance years Accrual rate per insurance year 79% of defined benefit plans have an annual accrual rate of between.5% and.8%. By comparison with the 2005 and 2007 data, there has been a shift towards lower annual accrual rates. Compared with 2005 and 2007, the change in annual accrual rates is negligible. Accrual rate per year Proportion of pension funds % 2% 5% 3% 5% 27% 22% 9% 4% 2% 6% 6% 7% 5% 33% 27% 29% 3% 6% 7% 8% 5% 7% Accrual rate per year PFS 2005 PFS 2007 PFS 2009 Note: The accrual rate in percent of pensionable salary is rounded to the nearest 0.%. Hewitt Associates SA 2 Pension Fund Survey 2009

16 Retirement pension at age 65 Half of the surveyed defined benefit plans grant retirement pensions of between 64% and 72% of pensionable salary at retirement age 65. The benefit level is significantly higher than that for defined contribution plans under the golden rule assumption (36% to 46%). However, in the case of defined contribution plans, benefits have probably been underestimated since, in the past, the interest credited to retirement savings capital has generally been higher than the growth in salary, and defined contribution plans insure higher pensionable salaries on average. The least generous defined benefit plan targets a retirement pension of 57% compared with 94% for the most generous. In view of the benefit adequacy provisions of Article OPP2/BVV2, the most generous pension plans must ascertain that their maximum regulatory benefits do not exceed the upper limit of 7 of the last pensionable AVS/AHV salary or savings contributions of 25%. Comparison of retirement pensions at age in % of pensionable salary PFS 2005 PFS 2007 PFS 2009 Effects of early retirement Analogous with defined contribution plans, defined benefit plans also cut back retirement pensions at early retirement to account for the shorter contribution period and the longer duration of pension payments. The corresponding reduction varies from 7.5% to 2.% (see following table). The reductions are generally significantly lower than in defined contribution plans (ranging from 4% to 8%) indicating that defined benefit plans continue to generously subsidise early retirement at the expense of the entire membership. In all probability, every new retirement generates a loss for the pension fund. Retirement pension at age 65 in defined benefit plans PFS 2009 PFS 2009 Retirement age 62 Retirement age 65 Difference Maximum (0) 82.2% % Upper quartile (75%) 66.6% % Median (5) 6.6% 68.4% -0. Lower quartile (25%) % -0. Minimum () % Note: The retirement pension is calculated based on the annual accrual rate and the projected years of pensionable service at age 65. Financing of benefits Whereas contribution scales graduated by age are the norm in defined contribution plans, they tend to be the exception in defined benefit plans. 78% of defined benefit plans finance benefit promises by means of uniform contributions independent of age (flat-rate scales, see graph). Moreover, 4 of the pension funds with contribution scales graduated by age apply a uniform employer contribution scale throughout their members working careers. Defined benefit plans do not have steeply graded contribution scales like for example those used to determine the LPP/BVG minimum account balance. The average total contribution of both savings and risk components of the surveyed pension funds equals 8.5% of the pensionable salary within a range of to 25.4%. In pension funds with high contributions, the contributions generally include the financing of salary-related benefit increases for Hewitt Associates SA 3 Pension Fund Survey 2009

17 active members. In such cases, the pension fund is financing the cost of future salary increases on its own terms and within its own responsibility. These pension funds should carefully monitor the risk of a significant increase in inflation (and indirectly of active members salaries) since most define contributions based on low-inflation scenarios. On the contrary, pension funds with low total contributions are passing on the cost of salary-related benefit increases to the employee or the employer who are in practice bearing the inflation risk. Ratio of highest to lowest total contributions 8 78% Proportion of pension funds 6 4 5% 5% 3% Graduation rate Note: In defined benefit plans, risk contributions are usually included in the total contributions. Young members eligible for risk benefits only were not taken into account. Graduation rates are rounded to the nearest Employer contribution share Employer contributions average % of the pensionable salary ranging from 7% to 6.9%, and represent 59.3% of the total contribution. The most generous employer pays 77.2% of the total contribution and the least generous the minimum compulsory 5. 53% of the employers pay between 5 and 59%, while 44% pay between 6 and 69% (see graph below). Only 2% of the employers pay 7 or more of the total contribution. These numbers also underscore the broad range of practice in implementing the LPP/BVG. Employer's share of contributions to age 65 Proportion of pension funds 4 35% 3 25% 5% 5% 37% 23% 2% 6% 2% 50-54% 55-59% 60-64% 65-69% 7 and + Employer's share Employee contributions In the surveyed defined benefit plans, members contributions average 7.6% of the pensionable salary, risk contributions included, and ranging from 4% to 0.5% (see graph below). The graph again shows that defined benefit plans tend to apply a uniform employee contribution rate or that, when they apply contribution scales increasing by age, the contribution scale is generally quite a flat one. Hewitt Associates SA 4 Pension Fund Survey 2009

18 Employee contribution - average value and range in % of pensionable salary 2% 8% 6% 4% 2% Pension fund Note: Risk contributions are included in the employee contributions. Members eligible for risk benefits only were not taken into account. Risk benefits Registered defined benefit plans insure death and disability benefits in compliance with the Swiss Constitution. Like for defined contribution pension funds, the minimum benefits are defined in the LPP/BVG. In 9% of surveyed defined benefit plans the risk benefits are defined benefit in nature. This means that the relevant benefits depend on the pension plan s annual accrual rate and the projected years of pensionable service at normal retirement age. Insured disability benefits In most defined benefit plans, the insured disability benefit is equal to the projected retirement pension at the normal retirement age. Half of the pension plans insure disability pensions ranging in amount from 6 to 72% of pensionable salary, or equivalently 4% to 5% of the base salary, for those who are eligible for the maximum number of years of service. For a shorter period of pensionable service, benefits are reduced accordingly. Disability pension in defined benefit plans in % of base salary PFS 2005 PFS 2007 PFS 2009 Insured survivors benefits In most defined benefit plans, the insured spouse s or registered partner s pension lies between 6 and 7 of the insured disability or retirement benefit or equivalently between 4 and 45% of pensionable salary (see table below). 7% of surveyed defined benefit plans grant survivor benefits to domestic partners. Moreover, half of the pension funds insure a child s pension of % to 5% of pensionable salary. The minimum LPP/BVG child pensions are in any event guaranteed. Hewitt Associates SA 5 Pension Fund Survey 2009

19 Survivor pensions in defined benefit plans PFS 2009 PFS 2009 Spouse s pension Children's pensions Maximum (0) 56.4% 23.5% Upper quartile (75%) 45.5% 4.4% Median (5) % Lower quartile (25%) 40..4% Minimum () 34.2% 2.6% Note: Survivors pensions are shown as a percentage of pensionable salary. Actuarial discount rate In most cases, defined benefit plans apply higher actuarial discount rates than defined contribution plans. 68% of the surveyed defined benefit plans are still calculating pension liabilities for active members using an actuarial discount rate of 4%; one quarter use a lower rate. 8% are still using an actuarial discount rate above 4%. The latter figure has declined significantly since the last survey. At the same time, a number of defined benefit plans use a lower actuarial discount rate for calculating pensioners liabilities than for calculating active members liabilities. 58% of the surveyed defined benefit plans use a rate of 4% and 33% a rate of 3.5% for discounting pensioners' liabilities (see graph). But these figures still show that defined benefit plans are reluctant to lower the actuarial discount rate. This is probably due to the fact that reducing the actuarial rate has an adverse effect on funded status and increases termination payments to exiting members unless they are adjusted accordingly. So for many defined benefit plans, it is probably easier to switch to a defined contribution design rather than to reduce the actuarial discount rate. Actuarial discount rate (pensioners) in defined benefit plans 58% Proportion of pension funds % 8% 3% Actuarial discount rate Hewitt Associates SA 6 Pension Fund Survey 2009

20 5 Funded Status and Remedial Measures Funded status and recovery plans for underfunded pension funds were the special focus of Hewitt s 4 th Pension Fund Survey. This section deals mainly with the data provided by underfunded pension funds. Trends in funded status The global financial crisis of 2008 left its mark on Swiss pension funds. The surveyed pension funds reported an average asset performance in 2008 of -4.4% with a standard deviation of 6.2%. Half of all the surveyed pension funds achieved investment returns between -.3% and -8.. The best performance was +5.7%, and the worst was -34.4%. At the same time, pension liabilities continued to grow, further worsening the financial situation. Poor investment performance and increasing pension liabilities led to a marked deterioration in funded status. While in 2007 only 7% of surveyed pension funds reported that they were underfunded, on 3 December 2008 the number soared to 67%, or 09 of the participating pension funds (see graph below). Those pension funds were required to analyse the causes of the underfunding and to submit a recovery plan to the Supervisory Authority by 30 June On that basis, the absolute majority of the underfunded pension funds confirmed that the deficit was primarily due to the poor investment returns. Barely reported specific structural causes (unfinanced pension benefits, inadequate risk contributions, etc.) and were accordingly obliged to make regulatory adjustments to contributions or benefits. Funded status between 2005 and Proportion of pension funds > % <9 Note: The percentage of pension funds refers to the total number of pension funds which participated in the Survey. Breakdown of underfunded pension funds The breakdown shows that defined benefit pension funds with a funded status of 9 or less account for more than 5% of the underfunded pension funds. These are primarily public pension funds. Otherwise, there is no significant distinction between the underfunded pension funds either in terms of plan design (defined benefit or defined contribution) or of geographical location. Over of the underfunded pension funds have a funded status of less than 9 combined with an actuarial discount rate of 4% or more. There seems to be a strong correlation between funded status and actuarial discount rates. The data collected shows that pension funds with a conservative actuarial discount rate tend to have a better funded status. From that it seems that it is mainly the pension funds with strong funded status that have reduced their actuarial discount rate in recent years. Hewitt Associates SA 7 Pension Fund Survey 2009

21 Funded status broken down by plan design, actuarial discount rate and geographical location Funded status on Total Defined contribution plans Defined benefit plans PFs with actuarial discount rate of 4% or more* PFs with actuarial discount rate below 4%* Frenchspeaking CH Germanspeaking CH less than % % over Total Ticino *Note: Two pension funds did not indicate their actuarial discount rate so that information is missing from the relevant total. Recovery capacity of surveyed pension funds In practice, a pension fund s capacity for recovery will be especially poor if it has a large proportion of pensioners. In 5% of the surveyed pension funds, pensioners represent over 5 of the total membership. If this situation is combined with benefits that are close to the LPP/BVG minimum, it will be extremely difficult for the pension fund to recover. Only one participating pension fund falls into this category. Conversely, pension funds with a low proportion of pensioners (4% of the pension funds) have an above average capacity for recovery. This effect is compounded in pension funds with a strong bias towards supplemental benefits. Only 3% fall into this category. They have an average funded status of 95% (see table below). Notwithstanding, they must still keep a close eye on their financial situation. Funded status depending on membership structure and retirement benefits Pension fund membership structure (pensioners as a % of total membership) less than to 24% 25% to 49% over 5 PFs near the LPP/BVG minimum Slight supplemental coverage High supplemental coverage % % 95.3% 94.2% 97.69% 94.99% 0.68% 98.79% 93.0 Note: Each number corresponds to the average funded status of all the pension funds in that particular category. The blocks which are shaded red indicate especially unfavourable financial and/or structural combinations. The blocks which are shaded orange indicate a serious financial and/or structural situation requiring a high degree of attention from the pension board. The green blocks indicate less problematic areas. For most pension funds (7%), pensioners represent between and 49% of total membership and the bias towards supplemental coverage is slight to high. These pension funds have a full capacity for recovery. Given their average funded status, which lies between 94% and 02%, most pension funds in this category should be able to recover under their own power. Remedial measures In the context of their notification obligations to the supervisory authorities, 58% of the surveyed pension funds stated that they expected future investment income to be sufficient to completely restore a full funded status within 5 to 7 years. These pension funds are therefore not obliged to adopt drastic remedial measures. Many pension funds have nonetheless decided to adopt individual corrective measures. Hewitt Associates SA 8 Pension Fund Survey 2009

22 Overview of remedial measures chosen in 2009 Number of responses Zero/lower interest rate Review investment strategy Remedial contribution One-time employer contribution Employee remedial contribution Employer contribution reserve with renounced use Restrict withdrawals for home ownership Reduce expected benefits Remedial contributions from pensioners Minimum interest credited on LPP/BVG retirement savings capital Reduction of administration costs Contribution from a financing fund 2 Other 6 Note: Measures decided by the 09 underfunded pension funds. Each pension fund could indicate its position on each measure. Many mentioned more than one measure. The measure chosen most frequently by underfunded pension funds was lower or zero interest credited (compared with the LPP/BVG minimum interest rate) on retirement savings capital, where feasible for a defined contribution plan (see graph above). 64% of underfunded defined contribution plans opted for this measure. Three-quarters of these pension funds preferred zero interest to a lower interest rate (0.5% or %) (see graph). Only 8% set an interest crediting rate for LPP/BVG retirement savings capital below the LPP/BVG minimum rate. Reviewing investment strategy was the second most frequently mentioned measure, although it was chosen by only 4 of the pension funds. This is surprising, since the deterioration of funded status should have reduced all pension funds capacity for investment risk. Apparently, most pension boards took the view that they had adopted a long-term investment strategy before the financial crisis, and that the deterioration in the economy was no reason to make any adjustment. Support in the form of a one-time contribution from the employer or an employer foundation was the third preferred measure. of underfunded pension funds received a one-time contribution from the employer and 4% received a one-time contribution from a financing fund. 7% of employers signed a declaration of renounced use on employer contribution reserves. Accordingly, up to 4 of participating underfunded pension funds received voluntary contributions in one form or another from the employer. This shows a high degree of social responsibility on the part of corporate management. Remedial contributions were chosen much less frequently. 2% of the pension funds opted for such contributions, including one pension fund which levied the remedial contribution from the employer alone.in 2% of the cases, pensioners were required to pay temporary remedial contributions or to accept a temporary reduction in their pension. Hewitt Associates SA 9 Pension Fund Survey 2009

23 Minimum interest credited on retirement savings capital in 2009 Proportion of pension funds % 4% Interest rate on retirement savings capital Finally, it must be observed that the exceptionally good performance on international capital markets in the 2 nd and 3 rd quarters of this year has contributed to improving the financial situation of pension funds. If the recovery continues through to the end of 2009, some underfunded pension funds could decide to relax or cancel certain of the individual measures adopted to restore financial equilibrium. Clearly, the best solution from the perspective of pension fund stakeholders active members, pensioners and the employers would be for a fully funded status to be restored mainly through future investment income. Only the future will show if this is a realistic hope. Hewitt Associates SA 20 Pension Fund Survey 2009

24 6 Trends in Occupational Pension Plans This section of the report identifies some of the trends within occupational pension plans, with the aim of showing some of the core developments and changes in this field. No distinction is made here between defined benefit and defined contribution plans, or between pension funds which are underfunded and those which are not. General Perception of risk within occupational pension plans In the 2009 Pension Fund Survey questionnaire, participants were again asked what they believed were the greatest risks and challenges facing their own pension fund in the near future. The information provided here reflects first and foremost the subjective perceptions of the pension fund respondents. It comes as no great surprise that investment risk was again perceived as being the key risk factor by far. However, despite the steep price adjustments of the last year, only a slightly higher percentage of pension funds this time mentioned investment risk: 43% compared with 38% in the previous survey. More than one half of the surveyed pension funds believe that they manage investment risks purposefully and appropriately which is probably why they do not regard investment risk as being the key concern. A growing number of pension funds see a risk in pensioners increasing life expectancy, placing it second in their concerns. This is probably because pensioners are assuming growing importance for the majority of pension funds. According to Swiss pension fund statistics, in 200 or 20 pensioners will for the first time possess more actuarial capital than active members. This trend will continue until contributions and pension payments become more or less equal in 0 to 5 years time; the Swiss pension fund system will then have reached full maturity. Occupational benefits risks 45% 4 38% 43% 38% Proportion of pension funds 35% 3 25% 5% 5% 6% 9% 6% 2% 22% 9% 4% 9% 5% 5%6% 3% 4% 2% 8%7% 5% Investment risk Disability Life expectancy Complexity Reduction in benefits Loss of confidence Other risks PFS 2005 PFS 2007 PFS 2009 The growing complexity of occupational benefits came third in the concerns of participating pension funds. This relates above all to the growing number of rules and regulations which are driving up the cost of pension fund administration. Among the suggested improvements in the current pension fund system was the urgent need to simplify the LPP/BVG and to reduce the volume of rules and regulations. Hewitt Associates SA 2 Pension Fund Survey 2009