Lower Interest Rates on Savings Balances

In 2021, you could get returns of over 20% on Swiss Performance Index stocks, which was three-and-a-half times more than in an average stock market year. But since February 2022, the economic recovery following the coronavirus crisis has been dampened by Russia’s war of aggression in Ukraine, and stock markets have fallen. Won’t the high stock returns from 2021 offset the losses in 2022?

Thomas R. Schönbächler: The stock returns of 2021 can still offset the losses suffered in 2022. But the main difference between 2021 and 2022 is not in stocks, but in bonds, which have also plummeted. We’ve never seen both stocks and bonds see double-digit percentage falls in the same year. The result is unpleasant, but a year like 2022 is par for the course for a pension fund and was probably statistically overdue after so many successful years. The global rise in interest rates by central banks means that existing bonds with low or even negative interest rates are valued even lower for the time being. These valuation adjustments essentially affect all pension funds. However, we expect the rise in interest rates to increase yield potential.

How is BVK responding to the significant fluctuation in the financial markets?

We have a long-term and balanced investment strategy. Price fluctuations can cause the portfolio’s asset allocation to deviate from the investment strategy in the short term. To this end, BVK has defined fluctuation margins at which it intervenes and manages the portfolio based on fixed rules and automatically reverts to the investment strategy. If, for example, sharp price drops caused the equity component to decrease and fall below the defined ratio, BVK would purchase stocks at lower prices in order to stay within the prescribed margin. In that sense we act counter-cyclically, in that we sell when prices are rising and buy when prices are falling.

No such rebalancing was carried out in 2022 due to the unusual simultaneous losses in both stocks and bonds. Taking account of last year, performance over the past ten years is still 3.6% annually.

And 2023 has got off to a better start. The provisional coverage ratio was already back above 100% at the end of January. We hope that this positive trend continues.

How is a positive performance used at BVK?

Firstly, current pensions need to be financed, which require annual interest rates of 1.75%. Then, interest is paid on the savings balances of working people. In a year with good performance, the remainder is used to increase the coverage ratio, in other words to create fluctuation reserves. Thanks to the very strong performance in previous years, we were able to set aside reserves at an early stage in order to finance additional credits until the end of 2026 for all insured persons at BVK who joined before 2022 – and that is unusual.

On its website, BVK projects that it will lower interest rates on savings balances to 1% from mid-2023. Why is BVK planning to lower interest rates, from 2.2% currently to 1%?

The interest rate depends on the coverage ratio and has been set out in the pension fund regulations for years. The definitive interest rate is set after presentation of the audited annual financial statements by the Board of Trustees and applies for twelve months from the middle of the year. Other pension funds set the interest rate retroactively. At BVK, the interest rate is known in advance. The interest also benefits people who take early retirement or leave BVK because they switch employers.

When the coverage ratio is between 100% and 114.9%, the interest rate on savings balances is 2% – although BVK increased the interest rate above the value stipulated in the regulations to 2.2% in mid-2022 due to the strong result in 2021.

At the end of 2022, BVK’s coverage ratio was at 97.6%. According to the pension fund regulations, when the coverage ratio is between 90% and 99.9%, the interest rate on savings balances is reduced to the minimum interest rate set out in the OPA, which is currently 1%. What’s important, however, is that this interest rate is paid on the entire savings balance. In other words, on the mandatory OPA component and on the much larger non-mandatory part.

The interest for last year therefore amounts to 2.1% on average. We expect 1.6% for this calendar year. On the myBVK customer portal, insured persons can view their updated individual savings balance at any time.

If the coverage ratio is under 100%, the interest rate applied to the savings balances of working people is reduced to be able to finance the pensions of over-65s. So doesn’t that mean that there is inequality in the way that working generations and retired generations are treated?

Last year, active insured members got 2.1%, so a higher interest rate than pensioners at 1.75%. As a result of the coverage shortfall, the interest rate for insured persons is now expected to fall to 1.6%, resulting in minimal redistribution. BVK was the first major pension fund to lay the foundations to ensure long-term equality of treatment between generations.

The Swiss Federal Audit Office SFAO examined the costs of pension funds and concluded that policyholder administration costs an average of CHF 430 a year per insured person and portfolio management accounts for 0.46% of costs. What is the situation at BVK?

We have nothing to hide in this regard. At 0.15%, our portfolio management costs are three times lower than average. In other words, for every CHF 100 francs of invested capital, we spend 15 cents. If we spent as much as the average, we would have additional recurring expenses of over CHF 114 million a year. But thanks to our systematic cost awareness, this amount remains in our fund.

In terms of policyholder administration, we are four times lower than the reported average, at CHF 108 per insured person per year, although we still have to analyse the SFAO’s figure. One of the industry benchmarks we use has costs of CHF 289 – but we are miles away from that figure too.