Impact of the COVID pandemic on social security

When assessing the impact of the COVID pandemic on the social security systems, in particular the Swiss pension funds, not only the effects on the investment markets must be considered. This would be too brief. Macroeconomic and demographic developments can also have a corresponding influence on the financing and benefits of the individual social security funds. In addition to the effects of asset investments, we try to make a rough interpretation of the other major influencing factors and their possible consequences for the 1st pillar, and in particular for the 2nd pillar.

Investment markets in the first 7 months

The individual pension funds can define investment strategies of varying degrees of aggressiveness based on their defined risk budget. The better the structure of the fund, the greater the possible scope for the executive bodies to take risks in determining the investment strategy and thus to suffer greater fluctuations in investment performance. The Pictet LPP indices published are suitable for assessing the potential results of pension funds during the pandemic. The Pictet LPP indices track mixed portfolios with varying proportions of equities before asset management costs, taking into account the BVV 2 investment guidelines. The results of the individual indices as at the end of July 2020 show that although the pension funds suffered a massive loss on their investments in the first quarter, they had almost made up for these losses by the end of July. This is illustrated by the following overview:

Nevertheless, pension funds must primarily finance the interest obligations of active employees (0.75% according to the proposal of the BVG Commission), pensioners (between 1.25% and 2.5% for most funds) and often also excessive life expectancies. Nevertheless, an overall negative situation is emerging for the year 2020.

Impact on financing and benefits in general

An analysis of the deaths of the Swiss population over the last 5 years reveals a temporary increase in mortality in the 65+ age group, while there is hardly any statistical variation among the young (65). While in 2020 the covid-19 pandemic is the reason for this high mortality, in 2015 + 2017 this is the strong seasonal flu wave. However, the experience of the first wave of covid infections, especially the number of deaths, does not lead to a permanent reduction in pension payments despite the excess mortality and thus, surprisingly, hardly any reduction in expenditure for pension insurance companies. At best, excess mortality in 2020 will lead to a marginal technical gain, which will, however, not or hardly be felt in the structure of the insurance funds.

Will everything remain the same in the area of AHV benefits? Considering the influence of Covid, the answer to this question is basically yes. However, demographic developments remain the problem: the retirement of the "baby boomers" will follow in the next few years and will place a heavy burden on the AHV's redistribution result.

The impact of Covid on disability insurance is still difficult to assess. Experts expect the pandemic to lead to a higher number of prolonged incapacities to work and subsequent effects on disability. However, it will only be possible to conclusively assess these effects in the long term, and they indicate initial trends.

As expected, the short-term effects on the ALV are the strongest, even though the short-time work compensation also represents insured wages and relieves the fund of its own burden. So far, applications for short-time work have been submitted for an estimated 2.0 million employees. In contrast, the financial crisis was comparatively minor, with fewer than 100,000 applications. In addition, the experts expect the pandemic to lead to a rising unemployment rate, which will place an additional burden on the social welfare system. In general, it should also be noted that first-pillar insurance schemes are also expected to show negative performance results and will not be able to contribute to the financing of benefits in 2020.

And the second pillar in particular

Due to the continuing high volatility in the investment markets, low investment returns can generally be expected in 2020 and thus lower interest rates on savings capital than in 2019. This is also the result of the participation models that are now widely used by the health insurance funds, which will not leave the responsible bodies any leeway for better interest rates.

As mentioned, the effect of excess mortality is small and any short-term technical gain will be corrected by a medium-term undermortality. This scenario can be reliably assumed provided that the current pandemic does not lead to massively higher mortality or regular pandemics.

With regard to the effects on the health insurance funds, a general distinction must be made between short-term and long-term effects. In the short term, there is uncertainty regarding the payment of contributions and the risk of default on contributions from affiliated companies; this risk is already being felt in the course of the pandemic. In addition, the partial, temporary loss of rental income from commercial properties means that there is a lack of income, which clouds the prospects for returns. In the long term, and as a result of the damage caused to the economy as a whole or to the industry, employees and employers are likely to be reluctant to improve their performance and to compensate for the loss of performance (for example through low interest rates or reductions in conversion rates). Finally, pension funds must prepare themselves for the fact that the potential return on pension assets will continue to decline due to the economic recession.

Summary

In the current crisis, pension funds have proven to be stable and make a significant contribution to safeguarding pension systems. The coverage ratios are generally still at a high level, also thanks to the good last investment years, and a large part of the funds are still in surplus cover. The risk of restructuring and partial liquidations with insufficient cover can currently be classified as low.

The challenges of the second pillar have not changed due to the pandemic. Even though the maturity yields of risk-free German government bonds rose slightly in March 2020, we are still in an interest rate environment that is damaging to the 2nd pillar. The redistribution between the generations is still gigantic, mainly because of the benefits promised by law, which are too high, and the system remains under pressure. The main danger from the pandemic for the 2nd pillar is that the urgent reforms will be politically delayed due to the lack of focus. This must be avoided as a matter of urgency.