The Impact of Pension Funding Mechanisms on the Stability and the Payoff from DC Pension Schemes in Switzerland

Adequately funding occupational pension funds is a major concern for society in general and
individual contributors in particular. The low returns accompanied with high volatility in capital
markets have put many funds in distress. While the basic contributions are mostly defined by the
state, the fund’s situation may require additional contributions from the insureds or may allow
the distribution of surpluses. In this paper, we focus on the accumulation phase of a defined
contribution plan in Switzerland with minimum returns and annual solvency targets in terms of
an assets-to-liabilities funding ratio. From the viewpoint of the pension fund, we evaluate the
outcome of selected funding mechanisms on the solvency situation. Taking the perspective of
the contributors, we analyse the payoff and the utility. Combining both prospects, we discuss the
boundary values that trigger the various participation mechanisms and their impact. We find that
remediation measures, while stabilising the fund, yield a higher volatility in the insureds con-
tributions. Further, surplus distributions lower the relative payoff utility of the funds members
and increase the frequency of remediation measures. Overall, insureds and pension funds will
profit from a cautious surplus distribution policy that focuses on keeping the stability high and
lowers the volatility of the result.