General questions on the actuarial basis

What is the difference between the actuarial and the generational methods of calculation?

The actuarial method is effectively a snapshot. The average life expectancy of a ten-year-old child is estimated as the same as that of someone who is 65. However, in 55 years' time, when the ten year-old is 65, they will very likely have a longer life expectancy than today's 65 year-old. The generational method of calculation factors in rising life expectancy, even after retirement. Our experts believe this to be the more reliable approach.

What is the 'cover ratio'?

The cover ratio expresses the relationship of the assets that are actually held to the assets that are needed from an actuarial point of view to pay pension benefits. A cover ratio of less than 100% is described as a shortfall in cover, while a ratio of over 100% is a cover surplus. Compared with the actuarial cover ratio (the official cover ratio), the financial cover ratio is lower because the capital on which current pensions are being paid is calculated as earning a risk-free interest rate. This method is a better reflection of a pension fund's capacity for risk.

What is the actuarial interest rate?

The actuarial interest rate is a mathematical factor which should correspond to the investment return that is most likely to be earned in the long term. In other words, it is the average interest that must be earned on the remaining capital to be able to pay current pensions. If the actuarial interest rate is reduced, the capital underlying current pensions must be increased so that they can continue to be paid at the same level.

What is the conversion rate?

The conversion rate is the percentage that is used to convert pension savings into an annual retirement pension at the point of retirement. Example: Retirement age of 55, pension savings of CHF 500,000, conversion rate of 5.2% The annual pension will be 5.2% of CHF 500,000, or CHF 26,000.

Why does the cover ratio fall when the actuarial interest rate is reduced?

The actuarial interest rate is a major factor in the level of the pension conversion rate. The higher the interest rate – and thus the expected yield – the higher the pension calculated as a result. A reduction in the actuarial interest rate therefore also affects current pensions. However, since these pensions cannot be reduced, the capital underlying them must be increased, i.e. the financial liabilities of the Schindler Pension Fund rise.


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