How does the second pillar environment work?

[OxygeN]

Hi all.
I know just the basics about the second pillar: the employer and the employee both contribute a part of the monthly salary into this "pillar". You can use that money only in specific situations before retirement - otherwise it's locked up until you retire (5 years before, actually). You can then decide if you want to cash out all at once or if you want the second pillar institute to pay you a monthly check. If you live longer than expected, maybe NOT cashing out is the way to go, but you can't foresee the future!
Now... let's go into that territory which is unknown to me (and maybe to others as well): what are the implications and correlations between the second pillar institute and the employer? I mean: I have a shitty interest rate since ever with my actual employer (in the last 2 years it was below inflation!), but there's friends working for other companies, who can profit from 4-7% interest p.a.! I've read and heard about "Unterdeckung" and "Deckungsbeitrag", but I don't understand how this works and thus, I can't grasp why other employers (with different second pillars) can give much better interest rates.
I'd like to understand and learn how this works, so that I might be equipped with enough knowledge to start a discussion with our CFO.

Anybody care to help?

 

[Baptiste Wicht]

It's actually fairly simple. There are plenty of pension funds, with different conditions and each employer is free to choose within them. Some of these pension funds are more aggressive than others and usually generate more returns. Some employers choose wisely, some don't. Sometimes, the employer does not have much choice because a) the best pension funds are pretty select with their members and b) some of the best pension funds are private pension funds (for instance, UBS has its own pension fund for its employees only).

The issue is that only th employer chooses.

 

[OxygeN]

It's actually fairly simple. There are plenty of pension funds, with different conditions and each employer is free to choose within them. Some of these pension funds are more aggressive than others and usually generate more returns. Some employers choose wisely, some don't. Sometimes, the employer does not have much choice because a) the best pension funds are pretty select with their members and b) some of the best pension funds are private pension funds (for instance, UBS has its own pension fund for its employees only).

The issue is that only th employer chooses.

This is the simple part indeed.
What about "Unterdeckung" und "Deckungsgrad" (taux de couverture)?
And what is the benefit for the employer to go with a pension fund which yields almost nothing in interest rates?

 

[Max]

What about "Unterdeckung" und "Deckungsgrad" (taux de couverture)?

Ooooh, Unterdeckung is the very most Swiss Angst! Many Swiss believe that a pension fund in Unterdeckung will stop paying pensions, go bankrupt and cease to be with all the money. This is THE reason why many employers choose Vollversicherung with miserable interest rates - because Vollversicherung never goes in Unterdeckung.

I know a reasonable definition of Unterdeckung:

Sinkt der Deckungsgrad einer Vorsorgeeinrichtung unter die Marke von 100 Prozent, sind beim sehr theoretischen Ereignis, dass auf einen Schlag alle Verbindlichkeiten einer Sammelstiftung oder eines Vorsorgewerks fällig werden, die Guthaben der Versicherten nicht vollständig gedeckt. Dazu müssten unter anderem alle Versicherten gleichzeitig austreten und ihr Vorsorgeguthaben abziehen. Ein sehr unwahrscheinliches Szenario.

 

[Baptiste Wicht]

Unterdeckung means that coverage ratio is below 100%. And the coverage ratio is how much they have in the funds in relation to how much people could withdraw.

If the fund has a 100% coverage ratio, it means that everybody could leave the pension fund right now and withdraw their money as a lump sum and the fund would be able to pay them. So a good coverage ratio is above 100%.

Below 100% means the fund has to be careful and generally will cut interest rate to go back to a better level.

 

[Max]

Below 100% means the fund has to be careful and generally will cut interest rate to go back to a better level.

The fund will also often organise remediation measures, which can include emergency payments from the employers and employees to restore the coverage ratio. Such remediation meausures are often put on the table at every stock market correction - because of the Angst and the lack of understanding of stock market dynamics. This is why Vollversicherung with miserable interest rates is attractive for employers: they never have to pay extra in case of Unterdeckung.

 

[OxygeN]

Ooooh, Unterdeckung is the very most Swiss Angst! Many Swiss believe that a pension fund in Unterdeckung will stop paying pensions, go bankrupt and cease to be with all the money. This is THE reason why many employers choose Vollversicherung with miserable interest rates - because Vollversicherung never goes in Unterdeckung.

I don't think my employer has "Vollversicherung", because apparently this is only offered by insurance companies. And our PK is at a "Sammelstiftung"... correct me if I'm wrong, please.

I know a reasonable definition of Unterdeckung:

Sinkt der Deckungsgrad einer Vorsorgeeinrichtung unter die Marke von 100 Prozent, sind beim sehr theoretischen Ereignis, dass auf einen Schlag alle Verbindlichkeiten einer Sammelstiftung oder eines Vorsorgewerks fällig werden, die Guthaben der Versicherten nicht vollständig gedeckt. Dazu müssten unter anderem alle Versicherten gleichzeitig austreten und ihr Vorsorgeguthaben abziehen. Ein sehr unwahrscheinliches Szenario.

I like this definition - and in fact I don't understand why when the talk is about "Unterdeckung" everyone (employer but also the BVG representatives) start acting shocked and express "fear"!
What happened to my employer a bit more than 15 years ago was that the PK suffered "Unterdeckung". I was told that in such a situation, the employer has to fill the gap and pay into the pension fund. The employer did pay what was needed without taking money from the employees, then immediately changed to another pension fund (the "Sammelstiftung" I mentioned above). And here's my missing knowledge: why on earth when a pension fund goes in "Unterdeckung" (because it traded badly or for whatever other reason), the missing money

1. has to be repaid/re-added into the fund?
2. the employer has to pay that money?

 

[Max]

I don't think my employer has "Vollversicherung", because apparently this is only offered by insurance companies. And our PK is at a "Sammelstiftung"... correct me if I'm wrong, please.

Strictly speaking, a Sammelstiftung can still be a Vollversicherung. The other type is a semi-autonomous collective foundation (teilautonome Sammelstiftung). And yes, Vollversicherung is only offered by (five) insurance companies. So you are probably not in a Vollversicherung. What is your pension fund?

I like this definition - and in fact I don't understand why when the talk is about "Unterdeckung" everyone (employer but also the BVG representatives) start acting shocked and express "fear"!

In my understanding, it has two reasons. First, the Swiss "have a high need for security" and pensions are nearly sacred in Switzerland (people vote against an additional holiday week but for a 13th pension payment). Second, Unterdeckung is interpreted as a pension fund's mismanagement result (which is not necessarily the case in a stock market correction - but it is nearly impossible to explain, because financial literacy is quite low, unfortunately).

And here's my missing knowledge: why on earth when a pension fund goes in "Unterdeckung" (because it traded badly or for whatever other reason), the missing money

1. has to be repaid/re-added into the fund?
2. the employer has to pay that money?

1. There is a regulation which defines the remediation measures (Sanierungsmassnahmen) in case of Unterdeckung. Actually, these measures should bring the coverage ratio back within five to seven years (sic!). Emergency payments are among those measures. They are hardcore measures, which are neither supposed to be used immediately, nor among the first ones, but - the Swiss "have a high need for security" and believe that a pension fund in Unterdeckung will stop paying pensions, go bankrupt and cease to be with all the money, hence the overkill.
2. The employer is one of the two payers into a pension fund (the other one is the employee), and he is also the one who chooses the pension fund. So it is not unreasonable that the employer is supposed to take responsibility.