The majority of UZH’s employees and retirees are, like other cantonal employees, insured in the BVK pension fund. In mid-2015, the Board of Trustees of BVK announced amendments to the pension fund regulations that will enter into force on 1 January 2017. In consultation with the University’s staff associations, the Executive Board of the University decided to establish a Personnel Committee mandated with reviewing the changes planned by BVK and giving a recommendation on further action. A key task was to assess whether UZH should terminate the extension of contract with BVK at the end of 2016 and join another pension fund.
The Personnel Committee began its work in March 2016. The five-member Committee thoroughly analyzed the situation and reviewed offers by various funds; its resulting recommendation was to change to the “Profond” pension fund or, as an alternative, the “Vita Joint Foundations”. (See communication from the Personnel Committee “Anschlussvertrag BVK”).
The Executive Board of the University carefully reviewed the recommendation of the Personnel Committee and factored its findings into the decision-making process. After thorough consideration, the Executive Board decided to remain with BVK. The reasons for this decision are outlined below.
Occupational pension funds constitute the “second pillar” of old-age benefits. Every month, contributions are deducted directly from employee salaries and placed in the fund, together with contributions from the employer. Over time, large sums of money are saved. The pension fund invests the money and credits it, with interest, to the accounts of the individual insured persons. As soon as an employee retires, the pension fund pays out the capital or converts it into a pension.
Two factors are important in this regard: The average life expectancy and the interest rate. The interest rate paid on the existing capital applies over the entire period of retirement; this rate is known as the “technical interest rate.” The conversion rate is calculated on the basis of average life expectancy and the technical interest rate. The old age savings multiplied by the conversion rate equals the annual pension.
Higher Life Expectancy and Historically Low Interest Rates
In Switzerland, the life expectancy of insured persons is increasing. This positive development means that the pension capital of pension funds must, on average, suffice for a longer period. As a result, pension funds must now calculate their annual pensions differently. If insufficient money is available to pay the pensions, the fund must either generate money via the capital markets, which is increasingly difficult and risky in the current environment of historically low interest rates, or undertake transfers from employed persons to retirees. This is achieved by applying a lower interest rate to the old-age savings of employed persons than the interest rate on pension capital.
For this reason, BVK will lower the technical interest rate as of 1 January 2017 to two percent, which will result in a lower conversion rate for active members. Taking into account both higher contributions and other measures to cushion the impact, the median reduction in pensions will be around 8%. As such, half of all insured persons will receive a reduction in their pension of less then 8%, while the other half will receive a reduction of over 8%.
Four Decisive Factors for Remaining with BVK
Remaining with BVK or changing to another fund was a difficult decision that depended on diverse and requirements. The Executive Board of the University based its decision on the following four factors:
- Sustainable and solid occupational pension fund;
- Financing in the short and medium term;
- No redistribution; and
- Maintaining strong ties to the Canton of Zurich.
BVK has performed well in recent years and reduced its undercoverage to a current coverage ratio of 98.7% (as at August 2016). Especially in times of historically low interest rates, BVK aims to base its investment strategy on a solid principles, i.e. maintaining sustainability and stability. The new conversion rate of 4.87% determined by BVK is based on a technical interest rate of 2% and the calculated life expectancy based on the so-called “generation table.” This table takes into account that a person who is 20 years old today, for example, will have a longer life expectancy upon retirement in 2061 than a person who is 65 years old today. From today’s perspective, the calculation basis at BVK is thus highly realistic and it can be expected that the solution entering into force on 1 January 2017 is adequately sustainable for all parties involved (insured persons, employer, and pension fund).
2. Financing in the Short and Medium Term
Many Swiss pension funds work with highly optimistic prognoses in regard to interest rate and demographic developments. If these scenarios do not eventuate, the active members will have to subsidize the pension payments of retirees; in other words, the younger generation finances the older generation. The Executive Board of the University wishes to avoid such cross-generational financing models. In this respect, it must be noted that the baby boomer generation at UZH will retire in the mid term. In a cross-generational model, the burden on the younger generation would significantly increase. The Executive Board of the University is convinced that other pension funds will have to employ similar measures to BVK if they are to calculate fairly across the short and mid term.
3. No Redistribution
It is important to the Executive Board of the University that active members and retirees are treated equally. At the same time, insured persons who do not retire from UZH or those who draw benefits in the form of capital should not be disadvantaged compared to the persons who retire from UZH. BVK applies an actuarially neutral conversion rate, meaning that pensions can be fully financed by the pension capital and technical interest throughout the term of life expectancy; active members do not subsidize pensions via lower interest on their savings capital. Due to the actuarially neutral conversion rate at BVK, insured persons receiving benefits in the form of capital and those receiving pensions are treated equally. The interest on old-age savings of active members fully benefits the insured persons and is not used to finance an inflated conversion rate.
4. Maintaining Strong Ties to the Canton of Zurich
UZH is an independent legal entity of the Canton of Zurich. Its status as an independent legal personality was provided for in the University Act of the University of Zurich in 1998. By taking this step in 1998, the cantonal government showed great trust in UZH and granted it a special position in the canton.
UZH is the only cantonal University with such a high budget; 60% of its funding is provided by the canton. The University enjoys freedom where freedom is required – namely in its core activities of research and teaching. UZH is, however, strongly rooted in the canton and also benefits from this close connection.
The Executive Board of the University recognizes the canton’s financial support in the restructuring of BVK. UZH sees itself as part of a solidarity-based collective with other cantonal organizations insured at BVK and is therefore willing to share the burden of the new measures as these will lead to long-term stability and security of the pensions of all persons insured at BVK.