Pensions: Attention, dammed-up capital

The 3-pillar principle was a typical Swiss compromise: The first pillar is the Pay-As-You-Go, the second is payment into an own pension fund, the third is savings. An assessment with suggestions for changes.

The three pillar economy

In the 1972 referendum, the citizens’ initiative to expand the Pay-As-You-Go into a national pension system was discarded. The Federal Council’s counter-proposal was chosen instead, which preferred the second pillar in link with Federal Law concerning occupational benefits.The first pillar, Pay-As-You-Go, is based on using the contributions received directly to finance current pensioners. The second pillar uses the own-fund system, i.e. the insured's contributions are invested in the capital market in order to provide the individual concerned with his own retirement fund. In retrospect, was this outcome of the referendum right?

In Switzerland enormous amounts of money are dammed up in retirement funds. The ratio of the three pillars to one another needs to be better adjusted if we are to avoid breaking the dam.

Accumulated capital massively exceeds gross domestic product

The introduction of the own-fund system caused massive capital accumulation. Ideally, this capital should be reinvested in the real economy. But such an enormous mass of capital cannot be absorbed by the real economy. In Switzerland alone, savings from the second pillar amount to more than 700 billion francs. By comparison, Switzerland’s gross domestic product in 2011 was 590 billion francs.

High probability of bubble formation

The economy needs credit for new investment, which it repays out of new activity, new value formation. If saved capital is not lent back into the real economy, but used to finance real assets and financial products of all kinds, processes are set in train that inevitably lead to today’s well-known financial bubbles.

While loans to industry for rationalization and productivity gains lead to lower production costs, consumer credit (borrowing to buy) and investment in merely financial products tends to result in price increases. Too much capital creates a huge demand for real assets, such as real estate (land). This is easily observed: return-seeking capital leads to high land prices and land speculation, leading in turn to rent increases.

In contrast to the own-fund system, Pay-As-You-Go contributions are used immediately again by pensioners to fund consumption.

Pay-As-You-Go funded by consumption (expenditure), not by wages (income)

Of course, Pay-As-You-Go has its drawbacks. Repeatedly put forward as the pretext against the Pay-As-You-Go system is the argument that it presupposes a demographic trend in which pensions are predominantly funded by the working population. But if Pay-As-You-Go is seen analogously to the taxes levied on domestic sales (VAT), then it would benefit from any efficiency gains in the economy generally and be fairly independent of demographic development. This financing method would also render the export sector more competitive, as social security contributions would no longer form part of labour costs, and thus not be included in the costs of goods.

Encourage circulation instead of hoarding

In itself, the 3-pillar concept is not at fault. But the ratios between the pillars need to be better adjusted. Especially by effecting balance between the first and second pillars – the amounts of capital and thus the amounts of credit which the real economy needs but can also absord – we have a tool for managing and adapting to the particular circumstances obtaining today.

The increasing frequency of today’s financial crises is caused by too large masses of capital. Again and again, they endanger economic life. Therefore, we should strengthen and expand the first pillar, while drastically reducing the second.

Daniel Maeder 



Now organised as a pension fund, the CoOpera Group comprises CoOpera Sammelstiftung PUK, CoOpera Investment Ltd, CoOpera Immobilien Ltd, CoOpera Leasing Ltd. As envisaged by the founders, pension funds should not be subject to the lack of transparency and unpredictability typical of the capital markets, but should flow directly into the financing of concrete, sustainable economic and cultural projects, thereby enabling such projects not only to have idealistic goals, but also to be commercially successful. It is because it has worked in this way for over 25 years that CoOpera’s pension funds have never been put into question in times of financial crisis.

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«We should strengthen and expand the first pillar, while drastically reducing the second.»

Case Study: CoOpera Sammelstiftung (Pension Foundation) PUK

Supporting people in their initiatives

The CoOpera Sammelstiftung PUK (a pension fund for businesses, artists and freelancers) was founded in 1984. Its membership numbers 430 enterprises with around 4,200 policyholders and 430 retirees. Total assets managed currently amount to approximately CHF 412 million.

The ideal goal of CoOpera Sammelstiftung PUK is to invest all the savings of the insured and pensioners in socially innovative, environmentally responsible and ethical investments in the real economy. Whenever possible these are made as direct investments. In addition to means of production (machinery, etc), as much as possible is invested where this also supports meaningful and real human relationships. Because of this approach, unlike with mutual funds and publicly traded stocks, virtually no investments are made in anonymous areas.

The PUK also differs from other collective institutions and insurance companies in the following areas: It offers more than 100 different insurance plans. It is risk-group neutral. Based on total solidarity, risk premiums make no distinction between male and female, young and old, or the various industry-specific risk groups. The conversion rate is 6.8% overall. All pensions are adjusted regularly for inflation.

Daniel Maeder,
Manager CoOpera