Investing for rainy days in Switzerland

Claudia is a forty-two-year-old marketing manager at a Swiss food manufacturer. She and her husband Mateo have two children aged seven and five. They are both pretty comfortable in their careers, and in less than eight years from now, they will be free from their mortgage and will fully own their beautiful family home. Still, Claudia worries about her pension. The purpose of our meeting on that rainy Tuesday in September was to interview her on the difficult subject of pension investments and on how new investment technology could perhaps help her take control of her financial future.

Retirement has been in the news a lot these past few weeks. There has been a very political debate about the issue. But for you personally, when you think about retirement, what are the first thoughts that come to your mind?

My first thoughts are actually positive ones: having more time, having more freedom to do what I want, not having to get up early to go to work, and enjoying life a bit more. But at the same time, at the back of my mind, I worry because of the simple reason that when I retire, there will be no more money coming in. There’s always this feeling of uncertainty. Will I be able to cope? Will I have to give up things? The older you get, the more you think about that. What will I have when I retire? Will the government have money left to pay state pensions? Will I have saved enough myself? Will I have done the right things? When you are in your twenties, you don’t give it any thought at all. But now, getting older, having children, more obligations, more expenses … it’s becoming a worry.

You can, of course, try to calculate your financial needs for the future, but I’m reluctant to do that. It’s pointless, somehow. I mean, you can calculate and aim for an amount. But will that amount be enough? You always end up thinking: I need to put more aside now, because when I retire, it will be too late. But who knows? Maybe I’ll need less money as a pensioner, maybe life will be cheaper. But maybe I’ll need more for healthcare or a retirement home. It’s very hard to get your head around that kind of stuff. I guess that’s why most people just pay into pension funds as much as their finances allow and then, basically, just hope for the best.

The most important thing to me would be to be able to maintain my lifestyle. It’s not about leading a life of luxury. It’s about leading my life the way I am used to now and not having to take a step back - or worse. I don’t want to end up having to leave the country and go live in a one-bedroom apartment in Spain or Portugal because life is cheaper there than it is here at home.

You always think: “Retirement is still far away.” But in fact, you should be mindful of it. We all live longer than we used to. That’s also why the government has decided to increase the retirement age for women. My brother-in-law, for example, was always very mindful of this. Ever since he was eighteen, he paid the maximum amount into the third pillar. I mean, he’s also in his forties now, and that guy really saved a lot of money in those years. I didn’t. I thought: “I need this money now - to go out, to go on holiday.” But now, I’m seeing the need to save up.

You talk about the state pension and the third pillar, but how well do you know the Swiss pension system, with its different pillars, tax optimization, and so on? Is it clear to you how the system works?

This is a question of interest in the subject. Again, in your twenties, you think: “Ah, we’ll see…later.” But if you look into the system, you quickly notice that it is very logical. The first pillar is a given when you work: It’s deducted from your salary - you don’t even see it. Same goes for the second pillar. That money is also deducted and goes … you know, somewhere. The third pillar is an investment you choose yourself. You can invest in with any financial institution, like an insurance company or a bank. The finer details, with regard to taxes and so on, are more complicated. I actually only understood how it all works when we were planning to build our house - when we all of a sudden had to “find money,” so to speak. By the way, when I started saving in a third pillar, I didn’t know I could use the money for a house purchase. I thought it could be used exclusively for my pension, for when I am old.

I get the impression that young people today are more engaged in understanding their pension funds than I was when I was young. I think they are more eager to start investing as soon as they begin working. Maybe it’s because retirement is in the news so much lately. They are more aware of the issue than we were years ago.

Thinking back, I wish I had known more about it. I knew, for instance, that I wanted to start a family and maybe stay home with the kids for a few years. But then you don’t work, and you can’t pay into a third-pillar fund anymore. It’s pretty unfair, if you think about it. It creates inequality and a gender gap, because men usually continue to work when they have children, and it is usually the women who take a break from work to care for the children. But why shouldn’t these women be able to continue saving for their pensions? I wish I had known about these things a long time ago. I wish I had been able to make some financial projections before taking such decisions. What happens to my pension if I interrupt my career? What happens if we use pension-fund money to pay for our house purchase? I might have made more considered choices, avoiding some possible painful disappointments later in life.

From all this, I gather that you are currently invested in a pillar-3a fund?

I’ve had a third pillar fund from early on in my professional career. It was just “something you do, if you have the money.” But I understand that it’s not easy paying almost CHF 7,000 a year if you are a single parent or if you have a low income. But if you can afford it, it definitely makes sense, even just from a tax point of view.

Which financial institution do you think is best placed to offer such a pillar-3a solution?

That’s hard to answer. It could be a bank, an insurance company… and then there are also alternatives like life insurance, and so on. I never really researched the pros and cons of the available options to find out which provider would be the best for me. What I heard from colleagues is that with insurance companies, you have to pay a fixed amount every month - and you really have to commit to that, and you can’t make changes to your investment along the way. Like, if you take out money early - to pay for a house or something - the insurance company will charge you, and you will lose money. For many people, this is a problem. I invest with my bank, and it is much more flexible. I can just choose how much I pay into my third-pillar fund. It’s usually somewhere between CHF 100 and CHF 400 a month. Looking back, I think it would have probably been better for me to have committed to a fixed deposit because if it is an obligation, you can’t escape it, and you just pay. And no, I don’t think I would have had a worse life because of that, you know.

So you chose a bank because of the flexibility?

Yes, I have my third-pillar fund with a cantonal bank here. We worked with the bank to finance our house purchase, and that was a good experience. It’s also easy to have all your finances together in one place. It’s easy in that you can just ask all your questions at one address. I more or less understand how things work at my bank now, and I’m not going to make things more difficult than they already are.

Why choose to invest in a pension fund at a cantonal bank, though?

Somehow, I feel that a cantonal bank is a more social company. It’s not some Zurich finance mega-player that’s constantly looking to maximize profits and then disappears when there is trouble. When there is trouble, a cantonal bank would say, “Okay, let’s see how we can solve this all together in a way that is fair for everyone.”

I think that what you are looking for when you select a third-pillar fund provider is a serious company where you feel secure. You don’t want to work with a company that makes you think, “What is this company? How big is it, really? How long has it been in this business?” Insurance, in my opinion, has an image problem. I don’t know if I can say this out loud, but I somehow always get the feeling that insurance companies are looking after themselves more than they are looking after me. I’m probably not being fair to them here, but anyway, these are reasons why I chose a cantonal bank.

What would you think of a mobile app for your third-pillar fund, where you create an account, fund it, and then follow up what is happening with your investments on your phone?

I think that when those bank apps appeared some years ago, it was a real blessing. Nowadays, I do everything on my phone. I don’t even use my laptop for banking anymore. So yes, an app for my pillar-3a fund would be good. Like everything, it ends up on my phone, which I always have with me, here in my pocket.

But you have to bear in mind that for many people, the time horizon is very, very long. So looking at your investments on a mobile app every day is not really useful. Plus, you can’t control the portfolio like you can control stocks on something like Swissquote or something similar. There, you can say, “I’m selling this right away” and take the money. But you can’t do that with your third-pillar fund. So, it’s useless looking at how that investment is performing all the time.

What would be good though, is some kind of simulation or calculation tool, because I would like to know what would happen if I increased my monthly contributions this year, what would happen if I took out CHF 20,000 next month to pay for my mortgage, when it would be sensible to split my portfolios, or what would happen if I decided to take out amount X when I’m sixty-five and amount Y when I’m sixty-six. Things like that would be very, very interesting to know.

I would even go as far as to say that a mobile app would be useful only insofar as I know what I should do, but the problem is that I don’t. So, maybe the app should be like some kind of advisor, saying, “I know you, and I know your situation, and right now, doing <this> would be best for you.” I wonder if such an app would be able to answer all my questions. Perhaps, using artificial intelligence, it would be able to do just that - perhaps even better than a human advisor ever could. These kinds of services are getting better and better, by the way. I just signed up for this thing with Swisscom, where if you choose to deal with the company via a chatbot instead of the call center, you get a discount of CHF 10 per month on your subscription. And it works pretty well, I have to admit.

So, the function of the app would just be to help you make informed decisions?

The app should also give me an overview of my investment. It should be transparent and clear: how much I’ve deposited or taken out and how much profit or loss I’m making. Now, I just pay money into a fund, but I don’t know anything about what is happening to it. Once a year, you get some kind of statement, yes, but other than that, there’s nothing. It’s like a black box. It is not transparent, and everything is completely out of my control. There’s nothing I can do. An app should also allow for spontaneity, like making it easier to start investing or changing things faster to keep pace with life changes. Pay more when you have the money, pay less when you don’t. This way, the ‘barrier to entry’ to pension saving could actually be lowered. I’m sure a lot more people want to invest in a third-pillar fund but don’t know how or where, or they are just afraid to commit to paying a fixed amount every month.

Do you know any Swiss apps for investing in a third-pillar fund?

No, I don’t know any. I mean, I have e-banking, and there is a third-pillar fund account that I can see there - but an app for this specifically…no. Maybe I can’t name any because I never looked them up. Or … hold on, I think I know one: Frankly. Isn’t that such an app? I heard of the name, but don’t know what it does, to be honest.

So, let’s imagine what such an app would look like. I’m going to propose some opposing characteristics and then ask you to tell me which of the two characteristics you would prefer in terms of what the app should be like. Ready? Here’s the first one: Would you prefer an app that is easier to use or an app that is more inspiring?

Well, I would need the app to have both characteristics, actually. But most of all, it should be easy to use. I don’t want to have to watch a tutorial or read a manual to use the thing. There’s nothing worse than having an app you don’t understand. I sometimes download an app, and then I have to make a login and go through all these steps. And if, after doing all that, I notice that I don’t understand it or if I don’t see the added value of the app, I delete it straight away. It may be strange, but that happens to me often. If I look at how many apps I download and how many I actually use…

But then, the app has to be inspiring too. Otherwise, you don’t keep it on your phone either. A user must get the feeling that they are really starting to understand this abstract, complex, financial “thing.” And ideally, they would then start to discover more options and features along the way, “Oh, it can also do this, and that, and that.”

As I said, though, first and foremost is simplicity. I mean, if someone had offered me something really simple, I would probably already have such an app. And simplicity to me is about very basic things. For instance, when I open it, I want to immediately see what my balance is. Where am I now? And if I want to pay money into it, I want to do it in just one click. Simplicity to me also means that it has to be very fast, because, let’s be honest, I don’t want to be spending much time on such an app. It’s functional - not for fun.

Next one: Would you prefer an app that is standardized or one that is personalized?

That is going to depend on the person you ask. I would say the app should be personalized. In the past few months, I’ve been checking out fitness apps. Most of them are standardized and don’t appeal to me. I want something that is tailored, that suits me, personally. That doesn’t mean that the app should require a lot of work and configuration from my end, because that would only make using it unnecessarily difficult.

But the system should recognize, for instance, that users might be in different life stages: that you are just starting your career at twenty-five, that you are forty years old with a family, that you are at an age at which you’re getting close to retirement, when you are in a situation in which you have either a lot or very little financial resources, or when you are working full time or taking a year off - those kinds of things. If it is tailored this way, users can identify with it. “Standardized” to me sounds like the app is a one-size-fits-all app, throwing all users into the same pile and not recognizing them individually. It’s very cold and distant.

What would you prefer, a standalone app or one that is part of your banking app?

In my banking app, I can now see my pillar-3a investment, so that I already have.

But yes, linking the app to my bank account is important because people don’t change banks every day. On the contrary: People tend to stay with their banks for a very long time. And that creates trust, which is super important for this kind of app. I mean, if you’re going to pay into a fund for thirty years, you will want to be sure that the company and the app are still going to be around then. Plus, I’m always trying to keep things manageable. Just like with our TV, Internet, and telephones, I like to group financial services together. I don’t want to have a different supplier for each type of product. That would mean a new account, a new website, a new bill, a new login and password, a new tax declaration document, and whatnot for each. That’s not what I want.

The app could be like an app inside a banking app, because pension investment does feel like something separate, doesn’t it? It’s not the usual money you work with and move around between accounts. It’s money you ideally don’t ever touch, so it should be put in a separate place somewhere in the app. Or … you know what would be really cool? That you have an app (or maybe a website) where you can safely “play around” with the numbers, like how much you might invest, the duration of the investment, what happens when you make a withdrawal, etc. And when you find the right setup, you say, “Okay, now put this into the banking app.” Then, you could play around in one place and seriously work toward your retirement in the other.

So how would you go about it: Do it all yourself, or do it with help from a professional?

I’ll do it myself. I don’t have time for appointments during office hours. I mean, finding a date for an appointment at the bank would already be a hurdle for me. The app should be made so easy to install that I can do it by myself in my own time. I could do it in the evening or something. Still, it would be good to also have access to support via telephone or chat in case I have questions or if I need some specific piece of information. Having said that, I’m absolutely certain that there will be people out there who actually need help, or just someone who gives them confirmation and reassurance, just to get it done. So, the bank would need to have both options available.

Do you want the app to be reactive (responding to your questions), or should it be more proactive (anticipating your questions)?

That’s such a hard question. And this is a thin line, too. On the one hand, if the app is purely reactive, I’d be sure to forget to do things or miss essential information, because, you know, this is boring stuff, and I won’t be paying much attention to it.

On the other hand, I hate getting push messages all the time. I usually even block them. For a pillar-3a app, there should maybe be a message ten days before the end of the year to remind me to pay into the fund and a mid-year check-in to say, “Hey, these are the options you have right now to optimize your situation.” But the app should be very selective and measured when it comes to proactively messaging users.

Last one: Should the app keep you up to speed with regard to what is happening to your investment and how the markets are evolving, or should it just leave you alone?

I know it sounds strange, but I think this is similar to cryptocurrencies. If you know what goes on in crypto, you will want to sell yours immediately. If you don’t know, you just keep them. The same applies to a third-pillar fund. The portfolio value can go up and down, yes. But there’s nothing you can do about that, remember. You can’t even take your money out of the fund! I think actively informing people about how their investments are performing is only going to make them nervous - maybe even to the extent that it could keep them from investing more in their third-pillar fund.

But the app has to be transparent. The information has to be accessible at all times. I’m invested, so if I want to see what is going on, I should be able to do just that. Like, with what is happening in the world now: war, inflation... I’d like to know what kind of effect these situations have on my investment outlook. In the long run, this could also help me avoid any nasty surprises when I turn sixty-four… or, no, I mean sixty-five.

FULL DISCLOSURE

Claudia was never interviewed by InvestSuite. In fact, Claudia does not exist. This interview is the result of a qualitative research project. In September 2022, we carried out nine in-depth interviews with five women and four men of different age groups living in both the Vaud and Zurich regions. The participants included a teacher, a housewife, an architect, an ICT consultant, a catering business owner, an advertising agent, an opera singer, and - no kidding - a Gruyère cheesemaker. The interviews followed an interview guide, were (video-) recorded at the homes of the research participants, and then transcribed and tagged in order to be processed into qualitative research findings.