It's as if these Swiss money managers -- Swiss! -- never heard of gold

Section:

Instead they're thinking of putting stacks of paper money in vaults to avoid paying the penalty of negative interest rates.

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Swiss Pension Schemes 'Bankrupt in 10 Years'

By Madison Marriage
Financial Times, London
Sunday, April 19, 2015

http://www.ft.com/intl/cms/s/0/aca0b86c-e51c-11e4-bb4b-00144feab7de.html

Swiss pension schemes will be bankrupt within 10 years unless Switzerland's government wins public support for a radical overhaul of the retirement system, experts have warned.

The pressure on Switzerland's occupational pension system, which accounts for SFr800 billion ($840 billion) of assets, has intensified this year due to recently imposed charges on cash accounts and shrinking government bond yields.

Martin Eling, professor of economics at the University of St Gallen, estimated that occupational pension funds will face a SFr55 billion hole in their funding by 2030 if the government does not overhaul the system.

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Occupational pension funds are legally required to pay retirees an annuity equivalent to 6.8 per cent of their total savings on an annual basis. This conversion rate is considered unsustainable given that it was devised in 2003 when life expectancy was lower and performance expectations were higher.

Mr Eling said: "This is not a sustainable situation. If we continue like this for 10 years the pension funds will be bankrupt and the companies [that pay into them] will have to be involved [in their rescue]."

Jerome Cosandey, an economist at Avenir Suisse, the Swiss think-tank, said that the Swiss National Bank's decision in January to cut the rate on deposits to -0.75 per cent, coupled with negative bond yields and increased currency volatility, has exacerbated the situation.

To avoid paying negative rates on cash accounts, some pension funds have considered extreme options such as depositing bank notes in bunkers or safes, according to Peter Zanella, head of retirement solutions at Towers Watson, the consultancy, in Zurich.

Marcel Staub, a partner at Novarca, a Swiss consultancy, said he knew one pension fund that is considering selling mortgages to retirees because "providing cheap mortgages would make more than cash." Another pension fund for medical workers has examined providing loans to surgeries as an alternative source of returns.

Mr Zanella said: "There are some very strange discussions going on right now. The big fear [among] pension fund managers is that things will only become worse. We have never faced such problems. This is absolutely new and people feel very ominous about it."

He added that many schemes are considering dumping government bonds in favour of riskier asset classes such as infrastructure and property to improve their performance. He described this as a "questionable" strategy.

Mr Cosandey said: "The situation was bad before January and it just got worse after that. If returns remain low, pension funds will not be able to finance their promises and will need to use their reserves. If the ratio [of assets to liabilities] sinks below 100 per cent, extra financing will be required, largely at the cost of the employer."

Companies are already facing difficulties. Credit Suisse's chief financial officer, David Mathers, said in February that the bank could encounter "a hit to capital of SFr500 million" at the end of 2015 due to the impact of interest rate moves on the company's pension fund.

"One of our priorities in the course of 2015 will be to work quite closely with the pension fund trustees to mitigate [this]," he said.

The Swiss government is debating lowering the 6.8 per cent conversion rate to 6 per cent and increasing social contributions per employee.

Mr Eling warned that the proposals do not go far enough and are likely to meet strong resistance from the public, which rejected a similar government proposal in a 2010 referendum.

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