Challenges confronting the pension system – options and limitations of monetary policy

October 31, 2019
PK-Netz conference, Berne

Summary

It is of great importance to the Swiss National Bank (SNB) that Switzerland’s pension system continue performing its pivotal economic and social function as well as possible. A healthy pension system is a key precondition for the prosperity and development of a modern economy.

For several years now, the occupational pension system has been facing particularly challenging conditions. These include persistently low interest rates, which are largely due to lower inflation expectations, an increased propensity to save linked to demographic change, and declining productivity growth. The rise in life expectancy poses another challenge. As a result, not only have pension funds’ earnings prospects diminished, but, as pensions are being drawn for longer, more savings capital is now required to finance retirement provision. The balance between income and expenditure has thus been disrupted.

What measures could contribute to a workable solution? There are frequent calls for the SNB to abolish the negative interest rate in order to ease the pressure on pension funds. The negative interest rate is an unconventional instrument, and one that has side effects. The SNB will therefore only continue deploying it as long as the monetary policy benefits outweigh the resulting costs. In the current economic environment, however, the negative interest rate remains essential. Without it, the franc would be even more attractive and would appreciate. That would greatly slow down Switzerland’s economy and cause unemployment to rise substantially – which, in turn, would have a detrimental impact on the pension system. A second common demand – that the SNB should transfer the income it derives from the negative interest rate to the pension funds by way of ‘compensation’ – is also problematic. Such a mingling of monetary and social policy raises the issue of potential conflicts of interest and would make it significantly harder for the SNB to fulfil its mandate.

The SNB contributes to ensuring a healthy pension system by pursuing a monetary policy geared towards maintaining price stability in accordance with its legal mandate. In the long term this facilitates economic growth and prosperity in Switzerland and safeguards purchasing power, all of which ultimately benefits pension fund members, pensioners and, in particular, the socially disadvantaged.

Pension funds, for their part, have already taken various measures to bring their income and expenditure into equilibrium. Further measures will be needed, however, to deal with the realities of the investment world and of demographic change. This will require a number of adjustments to the mechanisms relating to pension funds’ income and expenditure. Such changes present politicians with tough choices and trade-offs.

Download file now

The file can be downloaded with the button below.

Additional files

Related content

Author(s)

  • Thomas Jordan
    Chairman of the Governing Board

Your settings

Required: These cookies (e.g. for storing your IP address) cannot be rejected as they are necessary to ensure the operation of the website. These data are not evaluated further.
Analytics: If you consent to this category, data such as IP address, location, device information, browser version and site visitor behaviour will be collected. These data are evaluated for the SNB's internal purposes and are kept for two years.
Third-party: If you consent to this category, third-party services (used, for example, to add social multimedia content to the SNB's website) will be activated which collect personal data, process these data, disclose them abroad - worldwide - and place cookies. The relevant data protection regulations are linked in the 'Privacy statement for the website of the Swiss National Bank'.

Choose your preferred settings:

This website uses cookies, analytics tools and other technologies to provide requested features, content and services, to personalise the content shown, to provide links to social media, and to analyse the use of the website in anonymised form for the purposes of improving usability. Personal data are also disclosed abroad - worldwide - to video service providers and the analytics tools of these providers are used. More information is available under 'Manage settings'.