Lecture 1: Introduction into Social Security and Pension Systems Flashcards Preview

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What are the 4 main objectives of Pension Systems ?

1) Consumption smoothing between the working and the retirement period

2) Insurance against death, disability/illness and longevity

3) Poverty relief

4) Redistribution from the younger to the elderly and/or high income to low income


What are the 3 Pillars ?

1) Retirement and Survivors' Insurance/Disability Insurance
2)Occupational Pension/Accident Insurance (mandatory/non-mandatory)
3)Private Savings (partially tax-exempt)


Describe the 1st Pillar

It is financed as pay-as-you-go system and is run by government. It covers the whole population of CH even those who are not working. While the contribution is a fixed percentage of the salary, the benefits are capped and floored. The floor assures a minimum retirement and disability income to everybody, The cap leads to a significant redistribution form higher income to lower. The ratio between the two is 2 to 1.


What is a pay-as-you-go System ?

A pay as you go pension plan is a retirement scheme where the plan beneficiaries decide how much they want to contribute either by having the specified amount regularly deducted from their paycheck or by contributing the desired amount in a lump sum. A pay as you go pension plan is similar to a 401k. The employee can choose among the various investment options and decide on whether they want a higher return by investing in a more risky fund or a safer fund which provides steady returns.

When retirement age comes along, the beneficiary can choose to either receive the benefits in a lump sum or as a lifetime annuity where the benefits are spread in monthly payments throughout the beneficiary's lifetime. This is different from a fully funded pension where the company fully funds, manages and distributes the benefits at retirement.


What is a fully funded system ?

Fully funded is a pension plan that has sufficient assets needed to provide for all accrued benefits. In order to be fully funded, the plan must be able to make all the anticipated payments to pensioners. A plan's administrator is able to predict the amount of funds that will be needed on a yearly basis; a determination can be made regarding the financial health of the pension plan.


Describe the second Pillar

The pension part of the 2nd pillar covers all employeed that earn more than a minimum salary. It pays death, disability and retirement benefits. It is a collective anad funded system provided by separate pension funds typically linked to the employer. The pension funds are relatively free on how they structure the contribution and benefity but must at least meet a minimum standard which is based on a defined contribution plan with individual savings accounts. The contribution to these accounts is an age-dependent percentage of the coordinated salary. It is important to do so in order to avoid over-insurance. The individual savings account have to bear a minimum interest rate, which the Federal Council defnes annually ex ante. However, the part that exceeds the minimum standard is not subject to the Government's discretion.


Problems with the 1st Pillar ?

-Demographic challenges
-Impossible to stop once it is running


What is the main the difference between a funded and an unfunded system ?

The funded only work for the working population whereas the unfunded works for the entire population


Why can we observe a shift in asset allocation over the last few years ?

Because investment returns have decreased due to decreasing interest rates


What can you say about the performance distribution of the Swiss pension funds ?

The distribution is quite narrow. This is primarily due to stakeholders' primary focus. Indeed, they look at performance and not at risk => Large number of performance comparison available in the market. As long as the performance is in line with other peer pesion funds, the asset manager is not at risk!


Describe the 3rd Pillar ?

It covers all individual private savings including own used property. Even though they are partially tax-exempt, the total tax exempt annual savings amount is quite low. As a consequence of the 3rd pilar system, the retiree receives his retirement annuity typically from different sources, which need to be coordinated in order to avoid benefits gaps or over-insurance.