An aging society, low or no investment returns, unrealistic expectations of regulatory demands – the Swiss pension system is overstretched. Digitization could provide vital solutions, Jens Pongratz says in an exclusive essay for finews.first.

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Digitization doesn’t stop at the pension system. Neither does the relentless trend towards an ever more individualized society. Personal interest is getting more and more in the way of the communal spirit. Whether this is something good or bad is up to your own judgement. The statement of fact however was confirmed by way of popular votes on the state-financed radio and television system («Billag») and the pension provision bill 2020.

The votes showed a split going right through society, not just regionally, but also as a divider between generations. The question therefore is whether today’s unwritten pact across the generations needs to be reconsidered.

«The system cannot live up to pension goals»

The trend towards an individualization may have something to do with a lack of information and transparency in respect to the personal pension situation. Who could claim to have a complete overview of the personal wealth situation with all the three known pillars of the Swiss system?

Money earmarked for our retirement is invested in all three pillars according to set criteria with little flexibility, with the aim to achieve a return designed to provide a specific pension for all.

In this way, the system – and in particular the second pillar of the three – cannot live up to the sometimes very different pension goals and the pension provision of each person. Think only of the risk appetite, which varies widely between younger and older contributors, not least due to the individual investment perspective.

«Fintech and blockchain technology can help individualize pensions»

To take account of this aspect would require an individualization of the pension provision system – without giving up the communal spirit. How could this become possible? And what would pension funds have to do to satisfy the growing demand for more transparency and individualization?

Digitization could provide a solution with new opportunities to individualize our private provision and to put the second pillar into the context of the personal pension situation. Fintech with robo-advisory or the much talked about blockchain technology enable this today. It is possible to define a personal target and restrictions profile for each insured person.

«Algorithms can take over from advisers»

This would have to be put in context of a so-called personal balance sheet where you would get a list of the first, second and third pillars as well as possible further private pension savings. With such a balance sheet you would be able to identify possible shortcomings or frictions between goals and opportunities and to give each client a transparent and individual overview of his entire provision setup. Today, each and everyone has to carefully compile such an overview and analyze it with the help of advisers. In future, algorithms can take over this task.

From the point of view of pension funds, clients would receive an individualized investment strategy adapted not only to the person’s age, but also personal life situation and goals. That way, every insured person will get an individualized wealth allocation while remaining part of a whole, profiting from efficiency, know-how and benefits of scale.

«Pension funds need to step up digitally»

What does this mean for pension fund investment strategies? The beauty of this approach is that it has almost no effect on the investment strategy of a pension fund. Pension funds, insurers and the state pension fund however need to provide for the necessary transparency and to together ensure a technological solution to give customers an adequate and up-to-date overview of their savings and pension rights.

Only then will it become possible to implement the personal balance sheet and to deploy its full use. The providers thus are required to build a digital infrastructure and potentially also the know-how for an individual customer advisory. The set-up requires a further-reaching professionalization, also in asset management.

Jens Pongratz is director of investment solutions at Corestone Investment Management and manages the portfolios of Swiss and global customers. Before taking on that role in 2010, Pongratz was a senior analyst in the manager selection team. He joined Corestone in 2007. Previously he worked at Dr. Dr. Heissmann in Germany as an investment consultant. He has more than 16 years of investment experience, is a CFA charter holder and financial risk manager. He has two masters in economics.

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