Following the Pension 2020 rejection, Swiss citizens are still grappling with
pension reform—as well as a resulting tax
reduction.
Had the September overhaul been
accepted, Pension 2020 would have
revamped the first two sections of Switzerland’s three-pillar pension system, equalizing the retirement age to 65, while raising
both single and married taxes.
To better fund the scheme and introduce more retirement flexibility between
ages 62 and 70, social security and value-added tax (VAT) rates were to increase in
2018 by 0.3%. In 2021, VAT rates would
have risen again.
VATs will instead decrease January 1,
giving taxpayers and companies an increasingly short window to adapt their systems,
pricing, and agreements to the new rates,
codes, and invoice templates. Standard
and special rates will drop to 7.7% and
3.7%, respectively. The “reduced rate” will
remain at 2.5%.
While Parliament and the States
Council voted in favor at 101-92 and 27-18,
respectively, the people ultimately decided
against the controversial reform in a 52.7%-
47.3% vote.
Although the scheme has seen 15 referendums since 1931, the population has only
voted in favor of two: one in 1947, the other
in 1978.
“For more than 20 years, no result
has passed, and the reform is really urgent,
Learning from the Swiss
Fordham said at the Milken Institute Asia
Summit in September. “It’s very difficult
to measure the duration of such a conflict
or even the scope, but it is the single-big-
gest geopolitical threat, and one that would
also move markets. This is different from,
for example, the Syrian conflict, which has
been extremely disruptive on a human level
with the refugee crisis and everything else,
but hasn’t generated an oil price spike. So,
when we look at political risk, we look at,
for example, is it likely to cause an oil price
shock or a growth shock, and in the North
Korea case, if the worst were to happen, it
would be both.”
Even the most experienced analysts of
political risk, meanwhile, have a tough time
handicapping these kinds of tail risks. And
Trump’s temperament makes the exercise
even more challenging. “As someone who is a
veteran of doing this, I’m pretty loathe to try
and ascribe probability when there is just so
much volatility in the key players,” Fordham
said. “Not only is the North Korean leader
ramping up the tests with six this year, but
Donald Trump is also changing US foreign
and security policy in a way we haven’t seen
before. That mix of unpredictability in the
key leaders just adds to the risk of the poten-
tial for misunderstandings and accidents at
a minimum, and possibly something worse.”
Moreover, implications for markets
range on a whole host of outcomes—not just
if there is an all-out war or not. “I would also
say that this isn’t just a binary kind of an
outcome. Investors tend to see it as their ‘will
or won’t be’ conflict, and given that conflict
would be so disruptive, that’s just unlikely
to happen,” Fordham said. “There are also
implications in between those outcomes.
For example, trade disruptions, US-China
tensions, and other things that will also
matter to markets if they come to bear, so
that’s another way of looking at it from an
investment perspective.”
The risk of nuclear proliferation amid
a regional arms race and the instability it
introduces could be another risk for markets.
“A policy of deterrence against North
Korea would carry new concerns for proliferation, too,” analysts at the geopolitical research
firm Stratfor wrote in a report in September.
“Not only could South Korea and Japan seek
out their own nuclear weapons, but North
Korea would also set a troubling precedent
for other nations: So far it is the only country
to have joined the Non-Proliferation Treaty
before subsequently withdrawing to pursue
nuclear weapons.”
So far, investors seem to have turned a
blind eye to these mounting risks. Risk assets
such as stocks keep pushing to historic highs,
even as volatility remains muted. But it may
not be the absence of risks that is leading to
market complacency. Rather, investors find
it difficult to wrap their arms around risk,
and, therefore, it’s easier to ignore.
As 2017 demonstrated with a once seemingly impossible Trump victory, so-called
tail risks can materialize rapidly. And the
groundwork being laid for 2018 should be a
warning for investors to keep a sharp focus
on them, even if market complacency tells
another story. —Vishesh Kumar
especially for the first pillar,” Andre Tapernoux, Wealth Leader Switzerland, Mercer,
told CIO.
According to the Swiss government, life
expectancy increases, low interest rates, and
the impending retirement of the baby boomer
generation were the reform’s key drivers.
Although Pension 2020 was rejected,
Tapernoux suggested its naysayers did not
necessarily dismiss reductions, but more
so denounced increases and second-pillar
compensation measures. Tapernoux expects
a new first and partial second-pillar reform
around 2022, where approval would allow
at least a decade of first-pillar expenses,
providing enough time to find a more sustainable solution.
To prevent a possible insolvency, Switzerland again will need to modify its proposals
to better accommodate citizens.
Peter Zanella, director of retirement
service, Willis Towers Watson (Zurich), told
CIO the nation must address "urgent issues,”
including decreasing the second-pillar
conversion rate with “reasonable compensation methods” without grandfathering in
pricey and complex regulations. In addition
to an equal and flexible retirement age, and
an adjustment and funding increase, Zanella
said Switzerland should avoid any “
unnecessary further regulations that only lead to
higher cost without benefit for the insureds.”
Switzerland’s Federal Department
of Home Affairs could not be reached for
comment. —Chris Butera
