At its session of 26 August 2020, the Federal Council amended elements of four ordinances governing occupational pensions. Its aims were to take account of recent financial and actuarial developments and to implement various mandates issued by Parliament. The changes take effect from 1 October 2020.
In amending these ordinances, the Federal Council is bringing the provisions into line with current trends in the technical interest rate, mortality rate and disability rate. It is also implementing mandates issued by Parliament, in the form of parliamentary initiatives.
The changes affect:
- the Ordinance on Investment Foundations (IFoundO)
- the Ordinance on the Vesting of Occupational Old Age, Survivors’ and Invalidity Benefits (VBO)
- the Ordinance on Occupational Old Age, Survivors’ and Invalidity Pension Provision (OPO 2)
- the Ordinance on Tax Relief on Contributions to Recognised Pension Schemes (OPO 3)
Here, we explain the changes to the VBO. Part 2 of this blog series will cover the changes to OPO 2 and OPO 3. For details of the new asset class “Infrastructure investments”, see our blog post “Finanzierung von Infrastrukturanlagen in der neuen BVV 2 Anlagekategorie” (German only).
Adjustment of the technical interest rate
One change to the VBO relates to the technical interest rate, where a range from 2.5% to 4.5% has applied to date. In light of the amendment to Technical Directive 4, this lower limit is now too high and the benefits acquired by insured persons via purchases are inadequately funded. “Pension Reform 2020”, which was rejected by the electorate, sought to repeal this legislation and consequently leave the level of the interest rate entirely up to pension institutions. An amendment was unavoidable in order to reflect the realities on the financial markets while simultaneously avoiding losses for pension institutions. The Federal Council has therefore set a new interest rate range of 1.0% to 3.5%. As few insured persons still have a rate in excess of 3.5%, this amendment captures almost all technical interest rates in use.
Death resulting from a wilful act
If a beneficiary wilfully brings about the death of an insured person, the vested benefits institution(s) or tied private pension institution(s) (Pillar 3) may curtail or refuse to make their lump-sum payments (discretionary law). Mandatory occupational pension providers already have this right. To make use of this instrument, a vested benefits institution must make a suitable provision in its regulations, where it must also define the circumstances under which benefits will be curtailed or refused. It must also specify any repayment that will become necessary if criminal proceedings against a beneficiary were not known about when the benefit was paid out. If a death benefit becomes available because payment is curtailed or refused, it will be payable to the next beneficiary in line or next person with a beneficiary declaration in line. The vested benefits institution may not pay out this death benefit until a final judgement has been passed.
Pension division upon divorce while of pension age
If a couple divorce while of pension age, the pension must be split between the two spouses. The pension institution converts the amount actuarially. All pension institutions apply the same formula and technical inputs. The Federal Social Security Office (FSIO) now provides an electronic conversion program free of charge. As the Swiss Chamber of Pension Fund Experts is ceasing calculation of its technical reference interest rate, a new technical interest rate had to be defined. This is based on the average technical interest rate used by pension institutions with and without state guarantees and without full insurance coverage. The FSIO updates its electronic conversion program on 1 January each year. Discrepancies between this interest rate and the actual technical interest rate applied by a particular pension institution have only a small impact. Even with a 50% discrepancy and a larger age gap between the spouses, the effect on the pension institution’s obligations is less than 1%.
The technical interest rate must be lowered to ensure that funding is adequate. Occupation pension institutions can now add into their regulations a provision that benefits may be curtailed or refused where the death of an insured person is ascribed to a wilful act on the part of a beneficiary. The FSIO is also making available a free online program to calculate the pension division in the event of divorce while of pension age.