Pension market alert: Switzerland sets limits on how accredited pensions experts apply discount rates 

A new mandatory guidance is now in force for the Accredited Pensions Experts that advise Swiss pension funds regarding how the maximum discount rate that they recommend may be set.  A transitional period is currently underway, and the new rules will apply in full, from 2026. While these requirements apply to all Swiss pension funds (collective foundations, fully insured plans, and company-specific plans), opportunities are primarily available to companies with their own foundation, where there is a greater degree of control over financing strategy. 

These changes will be likely to result in additional funding requirements for many pension plans, especially those with a higher proportion of retirees.   

The new funding environment sets an overall market related maximum to the permitted discount rate used to measure the liabilities on a local funding basis and requires plans to reflect the structure of the pension plan when setting the discount rate.  This second element will require plans to set their discount rate with reference to the market rates relevant to the maturity of the liabilities. Based upon current market conditions, a typical pension plan with a mixture of active and retiree members could see a 1% p.a. reduction in the discount rate which could translate to a 7-10% reduction in the plan funding level (if they have not already begun reducing their discount rate or taking other actions). 

In the past, funding challenges have in practice been largely addressed through limiting or reducing benefits provided to current employees by way of reductions to the interest rate credited to members’ accounts and/or reductions in the amount of pension granted for a given amount of accumulated capital. Given that interest credits are already at a very low level in most plans, we expect that in future plan sponsors (and also active plan members) will more often need to increase contributions to finance funding shortfalls.

There are many actions that can be taken now to manage and mitigate the impact of the new funding requirements, for example:

• Assess the likely impact of the new rules on your pension plan.
  
  
• Investment strategy can be reassessed to optimize the risk/return balance in the light of the new rules.
  
  
• Contributions in respect of pensionable salary more than CHF 130,000 can be paid to a pure DC plan (a so called 1e plan).  This can also be attractive for the employees concerned, as they may be able to target investment returns significantly above the current rate of interest credits in the existing “Swiss DC” plan.
  
  
• Obligations for retirees could be transferred to a third party such as an insurer.  Adjustments to benefits may be possible to reduce the cost of this.
• The structure of benefits may be modified, for example by requiring part of the benefit to be taken as a lump sum on retirement or as a partially variable pension, limiting the build up of new DB risk.
  
  
• Guarantees could be made to justify a more aggressive investment strategy than would otherwise be permitted.