Press Release

Time-limited annuities in Switzerland

Relief for employee benefits institutions, fairness for annuitants

June 20, 2017
| Switzerland

ZURICH, 20 June 2017 – The Swiss system for providing old age benefits is facing major challenges as the financial security of pillars 1 and 2 is at risk. As a provider of consulting services to self-insured funds, Willis Towers Watson has developed a new model for the over-mandatory component of pillar 2, featuring time-limited annuities. This forward-looking pension model is attractive for both employee benefits institutions and pensioners.

Demographic changes, increasing longevity and persistent low interest rates will continue to have an appreciable impact on pension payments in the coming years. Employee benefits institutions are reacting to these trends by massively reducing conversion rates to under 5%. Employees who are approaching retirement are faced with the decision of whether to draw an annuity or a lump sum.

Acceptance of pillar 2 is diminishing

Employee benefits institutions and employees who are approaching retirement must try to estimate life expectancy and future yields over the next 25 to 30 years. The employee benefits institutions do this in order to ensure financial security, and future pensioners do this because they want as much of their capital as possible to be paid back to them in the future. Incorrect estimates will have a negative impact, either on the self-insured fund or on the pensioner. Clearly, self-insured funds have a natural advantage and can set conditions and conversion rates.

The longer the period over which these estimates have to be made, the greater the likelihood that the assumptions about life expectancy or achievable yields will not materialise. The lower the conversion rate, the greater the risk for pensioners that they will be unable to use up the lump sum retirement benefit that they have saved. The attractiveness of annuities and acceptance of pillar 2 is diminishing.

Time-limited annuity as a possible solution

As a provider of consulting services to self-insured funds, Willis Towers Watson is proposing an innovative approach to solving this problem by means of a model for the over-mandatory benefits featuring time-limited annuities. Under pillar 2, this means that the over-mandatory annuity is time-limited.

The pensioner can determine the period over which they wish the benefit to be paid (for example, 15, 20 or 25 years) and can thus influence the amount of the monthly pension payment. After the duration of benefit payment expires, the pensioner receives the accumulated interest as a final payment. This model offers greater predictability for self-insured funds and minimises the risks associated with interest rates and longevity. At the same time, pensioners can be certain that the capital they have saved is guaranteed to be paid out and will not revert to the self-insured fund.

"A time-limited annuity is a form of the over-mandatory pension component which is extremely attractive for self-insured funds as well as pensioners," says Dr. Christian Heiniger, an expert in self-insured funds at Willis Towers Watson, explaining this approach.

Flexibility in retirement planning

On the one hand, self-insured funds can minimise their reserves, and on the other employees can benefit from the option of having their annuity paid out according to their individual needs, while also retaining the choice of lump sum payment.

The new model meets the different needs of today's employees and future pensioners and offers a high degree of flexibility when planning retirement. If an individual should happen to die before the specified duration of benefit payment expires, the approach offered by Willis Towers Watson provides for payment of the full amount of the residual over-mandatory assets to the surviving relatives. Thus the time-limited model also offers restitution. This represents an additional advantage over the standard procedure today, under which any residual assets revert to the self-insured fund and become accounts for termination.

Majority of Swiss could benefit

Since the new approach relates solely to the over-mandatory component of occupational employee benefits provision, the basic pension provision under the AHV and BVG remains unchanged. According to Christian Heiniger, more than 50% of future Swiss pensioners could benefit from increased flexibility in respect to drawing their over-mandatory pension assets while maintaining the same level of security in the basic pension provision. "Conversion rates have steadily declined over the past few years and the trend continues unabated. The lower conversion rates fall, the more attractive the model of a time-limited pension with restitution becomes," adds the expert in self-insured funds.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals.  Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Willis Towers Watson is represented in Switzerland with branches in Zurich, Geneva and Lausanne.