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

Thomas Jordan, Chairman of the Governing Board

PK-Netz conference, Berne, 31.10.2019

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.