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New linear annuity system: Impact and challenges for Pension Funds

360°Benefits I News

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By Angelica Meuli and Samuel Neukomm | May 31, 2021

The revision to the "Continued development of disability benefits" is expected to enter into force on 1st January 2022.

The revision to the "Continued development of disability benefits" was approved in the Swiss parliament in June 2020 and is expected to enter into force on 1st January 2022. The revision aims to facilitate the return to work and prevent disability. The revision of the legislation involves a closer monitoring of and assistance for children with congenital disabilities; it aims to provide specific support for young people transitioning to working life, and it extends the counselling and other support services relevant to people suffering from mental health issues. To achieve these objectives, a closer collaboration between doctors, employers and the disability benefits system is planned, as well as the introduction of a new linear annuity system.

New linear annuity system

The current tiered annuity system is to be replaced by a linear annuity system.

Dispatch of 15.2.2017 on the amendment of the Federal Disability Insurance Act (further development of IV).
Linear annuity system (full pension from 70%)

Source: Dispatch of 15.2.2017 on the amendment of the Federal Disability Insurance Act (further development of IV).

While the introduction of this system will increase the amount of disability annuity received by some insured persons, others may see their disability benefits reduce over the medium term. In order to mitigate these effects, the legislator has introduced a number of transitional measures for three groups of insured persons.

Transitional provisions

Overview on Transitional provisions
Disability annuity Details
Pensioners under 30 years old on 1 January 2022
  • For these individuals the disability annuity will be moved to the linear annuity system over a period of ten years, provided they have not already been adjusted in an ordinary revision.
  • If this change leads to a reduction in the amount of the disability annuity, the old benefits will continue to be paid except if the degree of disability changes by 5% or more or increases to 100%.
Pensioners between 30 and 54 years old on 1 January 2022
  • For these individuals the current disability pension will be maintained except if the degree of disability changes by 5% or more or increases to 100%.
  • The current disability annuity is also maintained if the new system leads to a reduction in the pension despite an increase in the degree of disability, or to an increase in the pension despite a decrease in the degree of disability.
  • The revision will be based on the new linear annuity system.
Pensioners aged 55 and older on 1 January 2022
  • The disability annuity for these individuals will change to the new linear annuity system and the revision will be made according to the old system.

As these legal changes are only binding for the minimum BVG component, the Board will have a number of possibilities to consider. For example, whether the plan should be transferred to the new system, particularly in the case of a supra-mandatory plan (where benefits exceed the BVG minimum). Alternatively, the Board might decide that the new system only applies to the minimum BVG component, with the old system being retained for the supra-mandatory part.

While all of these options have advantages and disadvantages, some may be more complicated than others in their implementation and a case-by-case assessment will need to be made. But here are some initial thoughts for consideration:

  • In the event of a transfer to the new linear annuity system, a number of regulatory details will have to be amended. Insured persons must to be informed of the change and the Board will need to work closely with the administration to implement the new system. Although the workload involved with this option might seem daunting at first, we believe that it is well worth considering, especially as it seems that some reinsurers have already planned for the transition to the new system to not involve an increase in premiums.
  • If the old, tiered system is retained, the minimum BVG benefits will be guaranteed. Thus the amount of the regulatory disability annuity will only be adjusted if it falls below the BVG minimum disability annuity. The main disadvantage of retaining the old system is that the disability benefits and the Pension Fund will need to work with two systems. While, up to now, most Pension Funds have applied disability benefits rules regarding entitlement to a disability annuity from the plan, maintaining the current system could lead to confusion among insured persons. This is because an adjustment to the disability benefits will no longer necessarily apply, if the degree of disability changes.
  • Finally, the last option mentioned, i.e. running the two systems in parallel, is in our opinion the least suitable approach. This would require the implementation of all the elements mentioned under the first point, while also being complicated in terms of communication.

Conclusion

Given the scope of the changes involved, the key point is to prepare as far in advance as possible. We therefore recommend that all Pension Funds address this topic now and already initiate discussions with the various stakeholders involved. We are happy to help with any questions you may have and to provide any support that you might need.

Authors

Associate Director, lic. iur.

Director, Retirement Switzerland

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