echo interview with Daniel Leupi, Zurich City Councillor, Chief Financial Officer and President of the Zurich City Pension Fund

elipsLife echo: The end of August last year saw the Federal Council table a proposal for the reform of the AHV pension system in Switzerland. The Left is against raising the retirement age for women and the other parties miss forward ideas to solve the AHV’s structural problems. How do you assess the Federal Council’s proposal?
Daniel Leupi: It’s my view that securing the future of our pension system is one of the major challenges facing us in the years ahead, along with climate change, regulating the nature of our relationship with the European Union and the maintenance of an open and just society.

I haven’t yet delved into the details of the proposal. However, I think raising the retirement age is on the cards. We can’t just go on raising AHV contributions ad infinitum. People are living longer and as long as revenue stays flat as a result of low interest rates, we actually have no other choice but to raise the pension age. That being said, such a move would need to be accompanied by social cushioning measures. People’s expectations of their retirement, formed over more than thirty years of their working lives, can’t just be overturned in a short space of time. Those that still can have to be given the chance to adapt to the prospect of a higher retirement age. On the other hand, people on the verge of retirement, who can no longer make the necessary provisions for such a change, need to be given a helping hand. In a prosperous country such as Switzerland no one should have to endure hardship as a result of this development.
 
So you’re in favour of raising the retirement age for women to 65?
Yes, but only provided we have to talk about raising the retirement age for men as well. At all events, it’s essential we provide women with social and financial compensation to help them cope with this change. In this context, we would need to factor in, and discuss, all the areas where women are still at a disadvantage. With wage and salary comparisons here in Zurich city, for example, we see only a minimal, but still inexplicable, pay differential of 0.6% between men and women. So the public sector is undoubtedly doing better than some areas of private industry that still need to make more progress in this connection.

In your view, what’s the most important aspect of AHV reform?
The key area is sustainability. In Zurich, I also see this in our financial policy. In the medium- and long-term, we need to keep the systems balanced so that citizens don’t lose confidence in the central functions of the state. This applies particularly to old-age provisioning. In Switzerland, there are massive disparities in wealth and income. Consequently, social balance and security in old age are important issues.

Up to now, Switzerland has been committed to its 3-pillar system. Where do you stand on this?
I wouldn’t turn the system on its head. There’s no reason to do this since it’s essentially proved its worth. At the same time, however, one shouldn’t get defensive when it comes to discussing reforms. We have to realise that our pension system is currently under extreme pressure: Life expectancy has risen and the ratio between payment contibutors and payment recipients has undergone a substantial change for the worse. And on top of this, we have the problem of very low investment returns. 

How high will the pension age be when you enter retirement?
I’ll have reached the current retirement age eleven years from now. Given the speed at which our political system works, I’d guess that the retirement age will still be less than 70. Whether it’ll be 67, I don’t know. But at all events it’s going to rise, sooner or later. What we mustn’t do is adopt a ‘one size fits all’ solution: Those in office jobs can’t be treated in the same way as construction or shift workers. If the retirement age is raised, the various employee groups need to be offered customised, socially acceptable solutions. For me, this is an imperative. 

In the long run, isn’t a reduction in pension levels absolutely necessary?
What’s achieved by doing this? Yes, even with a reduced pension, the Swiss retiree who opts to live abroad can still live a pretty good life. That being said, in the classic pensioner emigration countries, too, the cost of living is rising. And in our country, certain household costs are ballooning as well. Just take medical insurance contributions or housing rents. Switzerland has established itself as a country with very high value creation. This leads to a high cost of living with consequently high pension levels. Otherwise, we’d run the risk of creating a two-tier society, along the lines of those who were able to accumulate capital and those who couldn’t. And it’s the latter category of people that really does need security in old age. This is an accomplishment that we shouldn’t give up.

You’re President of the Zurich City Pension Fund (PKZH). How is it doing?
The Zurich City Pension Fund is in a good place. In this connection, we shouldn’t forget that we’re always strengthening our accruals in order to finance reductions in the conversion rate. A performance of just under 10% means we can define 2019 as a very good investment year. At the beginning of December 2019, we had a very high coverage rate of around 118%. At the end of 2019, however, we lowered the technical interest rate – which we use to calculate pension assets – from 2.5% to 2%.  This reduced the coverage rate by approximately three percentage points to 115%. Currently, the PKZH has around 34,000 active insureds and approximately 19,000 pension fund entitled individuals.

As a member of the Greens, your pension fund’s investment strategy must be especially close to your heart, right?
For the PKZH, the question of sustainable investments is our permanent companion. We aren’t the first and fortunately not the only pension fund to adopt a sustainability stance. However, we’ve been doing it for quite a while now. And our climate strategy that we passed in 2018 means that the PKZH has taken on a leading role in this field. The municipal council, too, has high expectations of us and is always keen to know where we’re investing funds. I’m delighted that according to the latest WWF Ratings, our investment policies are way ahead of the field. It’s further proof that we as the PKZH do not simply wait until we have to act, but rather take a forward-looking attitude to challenges. Jörg Gasser, the new head of the Association of Swiss Bankers, has also pointed out that in the longer term, only sustainable, CO2-free business models have a future.  This realisation has to show the way forward for the whole pension fund industry.
    
The employers’ federation and the unions have tabled a proposal for restructuring the second pillar, which among other things entails a pension supplement financed by a contribution from wages and salaries. What’s your take on this?
We’ll be discussing this proposal in detail during the first quarter of this year when we take a closer look at the suggestions coming from the social partners. Since the PKZH is a non-obligatory pension fund, our management board regards the CHF 200 supplement as problematic. This supplement is intended to compensate for the reduction in the conversion rate from 6.8% to 6%. From this year, the PKZH has already reduced its conversion rate from 5.9% to 5.14%, accompanied by more or less full compensatory measures. For the PKZH, this pension supplement could lead to over-insurance, which could also be an unnecessary financial burden for the social partners. The city as an employer would have to stump up six million francs per year and those insured with the city, four million francs. Moreover, from the PKZH viewpoint, I wouldn’t regard such a pension supplement as necessarily fair either. It would mean the younger insureds having to pay increased contributions to finance the pensions of the older generation.

Although everyone agrees that reform is necessary, when it comes to political controversy, the pension funds usually make themselves scarce. Why don’t the funds take a more active role in the public debate?
It has to with the principle of parity. Board trustees have to sign off on the decisions taken by their pension funds. Employers and employees each have 50% representation on the board. And since the discussion of relevant issues reflect the different political viewpoints of the participants, it’s difficult for the pension funds to reach a consensus standpoint. There are often disagreements over goals and inevitably widely differing opinions on how these goals are to be achieved. Politics play an important part in bodies such as the PKZH, in a company pension funds less so. Since the various pension funds fulfil different needs and pursue different interests, they are not in a position to speak with one voice in the public arena.

Should current pension recipients also be asked to play a part in the financial restructuring of the second pillar or are already acquired pension rights taboo?
As far as the city of Zurich is concerned, already acquired pension rights would certainly not be affected by any restructuring. That being said, should it become necessary to pursue restructuring on an ongoing basis over years, with consequent increasing pressure on the active insureds, then one would indeed have to revisit this topic. But at the moment, we’re not in a such a crisis situation. 

Should the third pillar receive state support to relieve pressure on the first and second pillars?
Only a small part of the population actually makes use of the third pillar. Those already at the limit of their financial capabilities will hardly be in a position to save money for this purpose. On the other hand, those people with money should have no problem in finding ways to invest their funds and so save for the future. So in my view, further state support for the third pillar is not the way to solve the social problem.