Private provision for a secure retirement

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private pension provision for a secure retirement

Switzerland's pension system has been based for decades on the three-pillar principle. But the foundation of this system is crumbling: At a time when state reforms for old-age provision are meager, private provision must be addressed. How not to be left with empty pockets at an advanced age.

Private retirement planning is on the minds of many Swiss people. Individual saving is becoming more and more important, because the Swiss pension system has problems to finance itself. How to ensure that capital is also secured in old age?

Time-tested but in need of renovation

Swiss politicians have been struggling for years to reform the pension system. The state pension insurance AHV wrote losses of over 2 billion francs in 2018. Partial successes give a boost again, even if only temporarily. In 2019, for example, the Swiss electorate adopted the AHV tax bill. However, this temporary stabilization does not solve the main problem of the AHV: The number of pensioners is increasing at an ever faster rate compared to the working generation. Thus, the AHV spends more money on pensions than it can collect in contributions from working people. That's why experts see black for the financing of the AHV and forecast negative figures for 2023 already again.

Time to act

The Swiss pension system is structured in such a way that payouts from the first and second pillars account for around 60 to 70 percent of the final salary after retirement. This monthly amount paid out should enable the retired to continue their standard of living as usual. But practice shows that this has not corresponded to reality for many for quite some time: While the AHV is having a hard time for the reasons mentioned above, the pension fund has repeatedly cut its benefits and, as a result, also income from the second pillar. Financial blogger Fabio Marchesin, better known as FinanzFabio, believes that employees need to look at the third pillar of the pension system, especially under these circumstances: "AHV and pension funds can both no longer deliver on their promise to allow the continuation of the usual life support in an appropriate manner. Taking responsibility for your own money is more important today than ever before."

The third pillar for old age

Possible income gaps in old age can be closed with the help of pillar 3a. It is a form of pension plan established by the constitution, which focuses on personal responsibility. In Switzerland, banks and insurance companies are allowed to offer pillar 3a under different conditions. The client then has the option of paying in a maximum amount each year, which is intended for old age. It is important to note that the deposit rules at the bank are different from those at an insurance company: the insurance company sees the deposit as a fixed premium and requires the customer to pay it in regularly. But it also offers the customer risk protection. In the event of disability, the insurance company takes over future payments, so that there is no gap. A bank, on the other hand, does not set a deposit amount and leaves it up to the customer to decide how much he or she wants to put aside. However, this is also how gaps in savings can occur.

The state pension insurance AHV wrote losses of over 2 billion francs in 2018. Partial successes give a boost again, even if only temporarily.

"If you only want to save money, this insurance is not for you. Anyone who needs coverage for themselves and their family should go to the insurance company and get individual advice," says FinanzFabio. Both institutions offer two different savings solutions: Interest savings or securities savings. With interest savings, you opt for a safe savings solution with low returns. Saving on securities generally allows higher returns, but involves a greater risk of loss with investments in shares and bonds.

Don't just save for retirement

Employed persons with a pension fund can pay in a maximum of CHF 6,826 for the year 2020. For employees without a pension fund and the self-employed, the maximum amount is CHF 34,128 or a maximum of 20 percent of earned income. This saving for the future also brings benefits for the present. In addition to the fact that the money earned is invested consciously, one also benefits from a lower tax bill. The contributions paid in the year can be deducted from taxable income. At the same time, the interest income is not subject to income or withholding tax. Pillar 3a is also a safeguard for loved ones: In the event of death, the money saved is not lost, but goes to the heirs.

The saved capital in pillar 3a is basically reserved for retirement provision. This can be paid out five years before retirement at the earliest. The exception is a so-called advance withdrawal, where you can withdraw the money extraordinarily. The law allows you to draw on the capital you have already saved in your Pillar 3a account to take up self-employment, to finance your own home and the associated mortgage, or to emigrate.

Be smart about your own retirement planning

As soon as you are subject to AHV and until you retire, you can pay into the third pillar. "If you earn money regularly, it makes sense to take out a pillar 3a," says FinanzFabio. During a vocational apprenticeship, studies or other initial training, income is usually rather scarce. "But those who work part-time can also pay something in according to their workload," the financial planner continues. Irregular or low incomes limit savings potential, but every deposit has a positive impact on retirement savings. For young people interested in saving, FinanzFabio has another tip: "Invest in financial education first. Read books, watch relevant videos and learn about personal finance before investing money."

The legendary Johan Cruyff, one of the most successful footballers of the last century, used extremely convincing strategies and techniques in sports. Learn here from Ben Ritchie, Head of European Equities, Aberdeen Standard Investments, what this has to do with good investments.

"Playing football is very simple, but playing simple football is the most difficult thing ever", Johan Cruyff once said. The counterpart to this from the world of finance comes from one of the most successful investors of all time, Warren Buffett: "Investing is simple, but not easy."

Although it may not be obvious at first glance, the "Wise Man of Omaha" has a lot of experience and "El Salvador (the Redeemer), as his fans called him, according to Ben Ritchie have much in common – integrity, authenticity and a long list of achievements. Buffett's sayings will be familiar to many investors. Here, on the eve of the European soccer championship, is Johan Cruyff's strategies. After all, he enjoyed the reputation of a football god not only as an active player on the pitch. It was also to his credit that he made FC Barcelona one of the top addresses in European club football.

Basics for success

Every successful coach has to lay the right foundations. One of Cruyff's greatest achievements at FC Barcelona was that he radically revamped the club's training academy and youth development, says investment expert. Under his leadership, the club changed its approach: instead of selecting players for their size and physicality, the emphasis was now on technical ability. Lionel Messi is a product of that change, and it laid the foundation for the flexible, variable attacking football that characterized the following 30 years, says Ritchie. Similarly, Ritchie believes asset managers create fundamentals that allow them to perform well in a wide variety of market cycles. The technical framework should consist of robust investment processes and an effective risk framework. On this basis, good investment ideas can emerge and talent can be nurtured.

A firm eye on long-term success

In asset management – as in football – assessment periods are getting shorter every year. Markets are increasingly obsessed with next quarter's earnings. The focus has shifted from long-term growth to short-term returns. Such short-termism often gets in the way of investment success, Ritchie says. It has been shown time and time again that a long-term approach is often more successful. Ritchie also draws a parallel here with Johan Cruyff, who apparently saw it similarly. His FC Barcelona became Spanish champions three times in a row (1991 to 1993) with largely the same team. He didn't get frantic and make panic buys when things weren't going well, nor did he sign so-called "talents of the century" after just one good game. What asset managers can learn from this? The ability to stay true to yourself pays off and is a testament to special skill, says Ritchie.

Thinking unconventionally

Another aspect of successful management is the willingness to develop contrary views and opinions, to take risks with a sense of proportion, and to do things that may seem outlandish to the competition. According to Ritchie, in the world of finance this can mean deviating strongly from the benchmark or implementing one's own best ideas with ample capital. Sometimes it takes courage to classify something that the market considers a "signal" as "noise".

Ritchie is convinced that Johan Cruyff would agree. When the 4-4-2 was virtually the norm in football, he switched to a 3-4-3 – a formation geared more to offense than defense. He also put England's reliable goal-scorer Gary Lineker on the wing. The professional world cried out – the decision seemed ridiculous. But the results spoke for themselves: after all, that's how Lineker set up the first goal in the 1989 European Cup Winners' Cup final.

Putting together the right team

Europe is a deep and diverse market. He offered a wide range of structural themes, ranging from being at the forefront of "responsible capitalism" to being a leader in the game and, on the ESG front, extend to the digitization of the industry. Looking at the old narrative that Europe is a favorable market facing structural challenges, the tide is now turning, Ritchie knows. Active asset managers should take the opportunity to cherry-pick the good companies on the continent. The real skill, however, lies in combining them into a coherent, powerful whole, like a good football team.

But one could also disagree with Cruyff. Because he avoided coaching his defenders and goalkeepers – one of his famous sayings was that he'd rather win 5-4 than 1-0. While this may be entertaining for viewers, it is likely to be nerve-wracking for many investors. Because robust, reliable assets should form the core of a portfolio. This can sometimes mean investing in companies with less growth potential, but also less volatile returns. Certainly, transferred to football, not many goals are to be expected from such "players", but they will probably not allow many goals against either. Consumer staples stocks like Nestle or high-quality pharmaceutical companies like Novo Nordisk fit this profile, according to the investment expert.

These defensive positions could be complemented by a midfield of creative, innovative players. Of which, Ritchie says Europe has many to offer. For example, the Danish company Ørsted, an operator of offshore wind farms, or Knorr-Bremse, a provider of environmentally friendly technologies for the transport sector. Dassault and Nemetschek, on the other hand, are active in the digitization of industry. The list could go on and on.

Now for the striker. A position with a changing profile that is often misunderstood. Prerequisites for success here, he said, are versatility and a good nose for a goal. Good examples are Spain's Fernando Torres or currently Poland's Robert Lewandowski. Again, Ritchie draws parallels. In Europe, he says, there are many companies with similar characteristics: they are still fairly young, but growing fast and chasing market share from their big rivals. Examples of this, he said, can be found in the technology sector, including Adyen, a provider of digital payment solutions for businesses, or Prosus, an investment company that invests in Internet companies.

Final considerations

This is what a Johan Cruyff-type portfolio could look like. So close to the start of the tournament, perhaps we should let him finish: "Technique does not mean being able to hold the ball up a thousand times. Then you can go to the circus. Technique means passing with a touch, at the right pace, into the right foot of your teammate." The right balance just.

Investors have never been so optimistic since Schroders began surveying them in 2016. (Image: Shutterstock.com/lovelyday)

Schroders' latest Global Investor Study shows that investors are very optimistic about future equity market returns despite the ongoing pandemic-related turmoil. Is this feeling deceptive?

Savers are more optimistic than at any time in the past five years, according to the Schroders Global Investor Study 2021, and expect their future investment returns to average more than 11% per year. They are more inclined to invest further and review their investments more frequently – but most importantly, they expect higher future returns.

This recent forecast – showing what savers expect to see in each year through 2026 – is the most optimistic estimate since the annual survey began in 2016.

Optimistic investors and cautious experts

It is all the more surprising that this optimism prevails at a time of extreme uncertainty. Still, economies around the world have not fully recovered from the devastating shock of the pandemic. Previous studies in this series have shown that annual expected returns have increased by about a tenth in four years: from 10% in 2017 to 11.3% this year (see chart below). And this despite the fact that the actual investment values have shown a much bumpier development.

Last year, that volatility was even more evident in the short term: under the shock of the spreading Covid 19 pandemic, global stock prices fell 34%, but within nine months had regained and then surpassed their previous levels.

The forecasts of Schroders' in-house economists, who regularly revise their annual return forecasts, are much lower than those of investors. In January 2021, Schroders economists estimated annual long-term equity market returns for major markets such as the U.S., the eurozone, the U.K. and Japan to be 5.3%, 5.6%, 6.8% and. 3%2. That's less than half of what investors hoped to see in their responses to the Global Investor Study. And the economists' projections are only for stocks, which tend to yield significantly more than other components of a saver's portfolio, such as bonds and cash.

While the return expectations of the investors surveyed have risen year after year, the return forecasts of Schroders' economists for most industrialized countries have fallen in the last twelve months. The reasons for these differing expectations are many and varied.

Stuart Podmore, behavioral investment insights specialist at Schroders, believes the emotional reaction of investors to recent events and market movements is one explanation. He says the pandemic-related upheavals have caused concern, leading to a less long-term mindset among investors. "The pandemic, the lockdowns and all the associated disruptions may also have affected investors' ability to process risk," he says – with the possible result that "expectations of future returns become less realistic".

High total returns have boosted confidence

An intriguing aspect of this year's study is that those investors who classify themselves as "expert" or investors with "advanced" financial knowledge also have the highest return expectations. Those investors who see themselves as "experts" expect on average 43% higher returns per year than those who classify themselves as "beginners" or investors with "rudimentary" knowledge.

Interestingly, consistent with Stuart Podmore's theory, the percentage of investors who classify themselves as "expert" has also grown in recent years.

A review of previous editions of the survey shows that in 2018 – the first year investors were asked to categorize their knowledge – only 7% described themselves as "expert" and 26% as "advanced". By 2021, among the tens of thousands of respondents, the percentage of those who described themselves as "expert" or "advanced" had increased to 12% or. 29% up. "We may be looking at an example of a 'backslide' and hubris," says Stuart Podmore.

"Markets have been volatile in recent years, but total returns have been unusually high. The results were good in that the investors' portfolios increased in value. Thus, it is only human to assume – incorrectly – that all personal decisions were also good," the Schroders expert said. One gets the feeling that success is due to one's own judgment, and not to external factors outside one's own control. In turn, Podmore says this encourages people to be both more confident in their own knowledge and to believe that they will outperform others in the future.

What is the danger? Savers who succumb to a cognitive error, such as z. B. a backward-looking error, run the risk of losing sight of the long-term goals and plans that should underlie their investments. If circumstances change and the results are less good, there is a risk of irrational reactions.

"One positive trend that has emerged from the pandemic and the uncertainty associated with it is a greater interest among investors in their financial situation," adds Stuart Podmore. "But the last 18 months have taught us that the future is difficult to predict. A measured investment approach based on long-term goals is likely to serve investors better.

"We need to be cautious about expected returns. The outlook of many investors – especially those who see themselves as experts – is extremely optimistic," concludes the expert.

Time-tested but in need of renovation

Time to act

The third pillar for old age

Don't just save for retirement

Be smart about your own retirement planning

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