Sustainable and high-performance Pillar 2 solutions are in demand. Thanks to semi-autonomous PF solutions, SMEs and their employees have prospects of receiving significantly higher retirement benefits.
The first and second pillars are intended to guarantee a retirement income of around 60% of an individual's final earnings, thereby safeguarding their customary standard of living. However, rising life expectancy, coupled with the prevailing low interest rate environment and political conditions, will make it increasingly difficult to achieve this figure under Pillar 2.
For this reason, since the start of 2019 AXA has only offered semi-autonomous pension fund solutions instead of full-value insurance. This is because the "third contributor", i.e. interest, has a far bigger impact in semi-autonomous solutions with balanced asset allocation than in full-value insurance, where investment options are restricted due to a tight regulatory corset.
The amount of future retirement benefits is mainly dependent on the interest earned on the retirement capital and the conversion rate.
With regard to interest, it makes a major difference whether your retirement assets earn 1%, i.e. the BVG minimum interest rate, or 2%, which is possible with a semi-autonomous solution. Twice the interest rate can increase a person's pension by up to 20% over the course of their working life up to retirement thanks to compound interest. This alone could mean several hundred francs more a month for some people.
In addition, there is also the effects from the amount of the conversion rate. This rate determines what pension you can expect at retirement age based on the retirement capital saved.
The statutory pension conversion rate for mandatory benefits remains at 6.8%. This means that per CHF 100,000 retirement assets saved, an annual pension of CHF 6,800 is paid out. The conversion rate for extra-mandatory benefits is not legally regulated; in other words, the pension fund itself can set a percentage rate that is correct in its view. The rate is thus often significantly lower than the 6.8% paid for mandatory benefits. In full-value insurance, in particular, a decline in these conversion rates has been observed for years.
Semi-autonomous solutions have considerably more freedom and flexibility in their investment strategy than full-value insurance solutions and can take advantage of significantly better return opportunities over the long term to the benefit of their insureds. In this way, they not only offer their active insured persons higher interest, but rather also maintain extra-mandatory conversion rates that are stable over a longer period of time. In total, insured persons have prospects of a pension that is up to 30% higher than with a full-value insurance solution.
In the past two years alone since the change to semi-autonomy at the beginning of 2019, the insureds with semi-autonomous AXA solutions received a total of CHF 1 billion more in interest income than what would have been possible with full-value insurance.
AXA's collective foundations also have very sound financial and structural features, such as a high coverage ratio and low technical interest rates, a good age structure, a high share of extra-mandatory retirement assets, and a very low percentage of pensioners, which also significantly reduces the redistribution from insureds to pensioners.
“The good conditions of the semi-autonomous collective foundations of AXA speak for themselves. After nine out of ten existing customers opted to stay on board when the shift to semi-autonomy happened, AXA's collective foundations have also experienced renewed growth in new business over the past two years. New business tripled as of 2020. That is an all-time high,” says Constance Reschke, Head of Occupational Benefits at AXA Switzerland.
AXA pursues a risk-aware and sustainable investment strategy featuring a high degree of diversification, which gives rise to a stable performance and coverage ratio. AXA invested in interesting asset classes at an early stage to ensure the investments were attractive and sustainable. The average coverage ratio of the semi-autonomous collective foundations was 112.1% at the end of April 2021.
Daniel Gussmann, Chief Investment Officer of AXA Switzerland: “As an insurer and asset manager, we have the long-standing expertise to invest premiums and pension assets in a profitable yet secure way. In doing so, we pursue a risk-aware investment approach based on the best-in-class principle and rigorous sustainability criteria.”
AXA invests in line with clear climate goals, including pulling out of the coal industry completely by 2030 in the OECD and EU countries and by 2040 worldwide. AXA shrank the carbon footprint of its bond and equity investments by 31% between 2014 and 2019 and is now targeting a further 20% reduction by 2025.
AXA aims to restore Pillar 2 to health and to offer companies and their employees sustainable and high-performance solutions under Pillar 2.
Thomas Gerber, Head of Occupational Benefits at AXA Switzerland: “For pension funds, the environment during the past few years had grown increasingly difficult, and the economic challenges due to the coronavirus pandemic have exacerbated this trend further. Under the currently prevailing conditions, the gap between the benefits of a full-value insurance solution and that of a semi-autonomous BVG solution continues to widen. The more flexibility a pension fund has to react to the numerous challenges it is confronted with, the more likely it is to be able to offer a sustainably profitable, fair, and attractive solution for all generations.”