In recent years, many Swiss pension funds have lowered their conversion rates – including the Zürich BVK. Now, the pension fund is signaling a trend reversal that is likely to have far-reaching implications.
The headquarters of the BVK pension fund on Obstgartenstrasse in Zurich.
In recent years, Swiss pension funds have seen their conversion rates move in only one direction: downwards. Demographic changes and low interest rates have forced many pension institutions to reduce these rates.
The conversion rate determines how the retirement savings in the pension fund are converted into a lifelong pension. For example, if the savings amount to 600,000 Swiss francs and the conversion rate is 6 percent, the insured person will receive an annual pension of 36,000 Swiss francs. If the rate is 5 percent, it would only be 30,000 Swiss francs.
Therefore, the difference is significant when retiring with a conversion rate of 6.25 percent – as per the Swisscanto study, the average for Swiss pension funds in 2015 – compared to 5.37 percent, the 2023 value.
Raising conversion rates against the trend
Despite the downward trend in conversion rates, a bottom is slowly emerging. A strong signal in this regard is the plans of the BVK, the largest pension fund in Switzerland with 139,000 insured members. 40 percent of them are employees of the canton of Zurich, while the rest come from affiliated employers in the healthcare, education, and administration sectors.
Contrary to the trend, BVK plans to increase the conversion rates in its various pension models – starting from 2025.
In BVK’s standard pension model, the conversion rate for a person retiring at 65 next year will increase from 4.64 to 4.8 percent. This means that the pension will be paid at a constant level from the time of retirement until the end of life. With a pension fund balance of 600,000 Swiss francs at BVK, an individual will now receive an annual pension of 28,800 Swiss francs in this model. Without the increase, it would have been only 27,840 Swiss francs.
BVK has multiple pension models. In the “Plus” model, the conversion rate is higher than in the standard model. However, the survivor’s pension is reduced from two-thirds to one-third of the old-age pension. In this model, the conversion rate in 2025 will increase from the current 4.85 percent to 5 percent for 65-year-old retirees.
Some pension funds plan better benefits
The decision of BVK to increase conversion rates is noteworthy in several respects. This is evident from a look at this year’s highly anticipated study by pension provider Swisscanto. In this survey of 483 pension funds published at the end of May, although one in seven stated their intention to improve benefits for insured members.
However, almost all funds have been hesitant to increase conversion rates. Only three mentioned raising their conversion rates. Since pensions must be paid for life and represent a guarantee, many pension funds have been cautious. In fact, many funds indicated in the survey that they planned to further reduce their conversion rates in the coming years.
The move by BVK could now signal that the lowest point in pension fund conversion rates has been reached after significant declines in recent years – even though interest rates in the financial markets have fallen again in recent months. Due to its size and significant position within the Swiss pension fund landscape, BVK’s decisions could have a signaling effect for other institutions.
At BVK, conversion rates are linked to the so-called technical interest rate. This rate is determined by the pension fund’s board of trustees and is used to discount pension obligations. It indicates the expected return a pension fund anticipates on its assets in the coming years. According to the consulting firm PPCmetrics, the average technical interest rate of Swiss pension funds last year was 1.63 percent. However, there were significant variations, with rates ranging from 0 to 2.75 percent.
No more negative interest rates
BVK will raise its technical interest rate from 1.75 to 2 percent in 2025, according to Thomas R. Schönbächler, CEO of the pension fund. An evaluation revealed that there is now room for upward adjustment. BVK’s decision is also informed by the yield on ten-year Swiss government bonds, which are considered very secure. In 2022, BVK had previously lowered the technical interest rate from 2 to 1.75 percent when the yield on ten-year Swiss government bonds was -0.46 percent, in negative territory. Currently, the yield on ten-year Swiss government bonds is around 0.4 percent.
“The management of BVK is confident that higher returns can be achieved with investment assets than in the last evaluation,” says Schönbächler. Currently, the pension fund anticipates an annual return of 3.5 percent for the coming years, compared to 2.8 percent four years ago.
BVK has assets under management of 42.4 billion Swiss francs, with 438 employers affiliated. As of the end of September this year, pension assets were allocated to around 37 percent in equities, 35 percent in bonds, and 20 percent in real estate and infrastructure assets. Mortgages accounted for 5.6 percent of the investment assets. Schönbächler states that the real estate, infrastructure, and mortgage sectors will be further expanded.
“Overly strong reductions planned”
According to Thomas Breitenmoser, Head of Investment Controlling & Consulting at consulting firm Complementa, it is currently rare to see Swiss pension funds raising their conversion rates. “Many funds are still on the path of reducing their conversion rates.” In a survey by Complementa, the average conversion rate of the Swiss pension funds surveyed is currently 5.23 percent. According to the survey, this rate is expected to decrease to an average of 5.1 percent by 2029.
However, some pension funds have decided in recent months to deviate from the path of reducing their conversion rates earlier. “Some funds have realized that they had planned overly strong reductions in conversion rates,” says Breitenmoser. Based on data from the survey, a target return of 2 percent is expected on the liability side, which is achievable in the current market environment. It is observed in the industry that some pension funds have raised their technical interest rates from 1.75 to 2 percent.
BVK enters pension advisory services
feb. An increasing number of insured individuals are opting to receive their pension fund capital instead of a lifelong pension upon retirement. Provisional data from the Federal Statistical Office (FSO) shows that in 2023, insured individuals received retirement capital from their pension funds amounting to 14.8 billion Swiss francs. In 2015, this figure was only 6.3 billion Swiss francs.
This trend is also observed at BVK, says Schönbächler. Approximately one-third of pension assets are withdrawn as capital at his pension fund. Just over half of insured individuals opt for capital withdrawal or a mix of pension and capital. The decision between a pension or capital at retirement is crucial as it is irreversible. Schönbächler finds it concerning that there are often misadvisements in this area. Many financial institutions have a vested interest in advising customers to withdraw capital from the pension fund for management. This can lead to clients opting for capital withdrawal even though a lifelong pension would be more suitable for them.
Many inquiries to the BVK board of trustees have indicated a high demand for independent pension advisory services in the “pension or capital” area, says Schönbächler. Therefore, BVK is launching its own service in this area. Two BVK employees will handle the consultations. Individual consultations cost 1200 Swiss francs, while couple consultations cost 1500 Swiss francs. For individual consultations, the person must be insured with BVK, while for couple consultations, one person can be from outside BVK.
Unlike other providers, BVK does not need to sell investment products and can provide neutral advice, says Schönbächler. The prices are set to cover the actual costs of the consultation, no more.