Conversion rate, pension and capital

A new study, signed Credit Suisse, takes a look at the financing of pensions. The conversion rate, which allows the calculation of the annual pension from the second pillar fortune, is a central element. Its “appropriate” level, according to actuaries, is about 5%. This is below the legal minimum rate of 6.8%, which is applied to the mandatory portion of the fortune (resulting from savings on salaries up to CHF84’600 per year). On the portion beyond, the pension institution apply a rate, which is clearly below. But, as pointed out by the study, the average conversation rate is still about 5.5%, which is too high. This results in pensions taking out too much money from pension institution at the expense of the active members. In order to correct this situation, the conversion rate should be reduced in future. This should result in the active members saving more in order to preserve the level of their future pensions.

Unless they decide to receive their fortune in capital. 31% of the new retirees elect this option. 18% mix capital and pension. A project, aiming to forbid the payment of capital, in order to mitigate the risk that people require social security after having used all their assets, was rejected by parliament in 2016. Finally 51% prefer to convert the full amount of their fortune in pension.

The financial advantages of one or the other solution depend on known parameters such as income and capital taxes and the conversion rate. But there are also parameters which are unknown, like the future return on the fortune and the lifetime of the retiree. Taking into account all these parameters, the study is not in a position to draw a clear conclusion, except that lower conversation rates encourage people to take their capital.