In Swiss finance, a technical interest rate is a value used to calculate future payments relating to Swiss retirement instruments, including life insurance and pension funds.
The technical interest rate is a so-called discount rate. This rate is discounted from future benefits, meaning it is “counted back” from the benefit’s current value.
In the case of pension funds, there is no way to predict exactly how much retirement capital will grow because growth is dependent on future profits of investments. These, in turn, are dependent on developments in capital markets which can only be estimated, at best.
Because of this, the technical interest rate used by pension funds is not used as an actual interest rate, but only serves as a basis for performing estimations. The technical interest rate indicates the capital which the insurance company or pension fund expects to have available in the future.
In the case of Swiss life insurance providers, the technical interest rate is the growth rate “guaranteed” to customers by insurers.
The maximum technical interest rate is set by the Swiss Financial Market Supervisory Authority (FINMA). For life insurance provided outside of occupational retirement savings, this rate cannot surpass 60% of the rolling ten-year average of the base rate. This helps prevent insurance providers from making promises to customers which they will not be able to keep.
The maximum technical interest rate set by FINMA has been in decline for many years. In July, 2015, the maximum technical interest rate for life insurance was lowered once again. Changes implemented by FINMA only affect insurance agreements (policies) which are taken out after they come into effect.
Policies taken out before FINMA changes take place are not affected. The interest rate for a life insurance customer is set at the time that their policy is take out, and remains in effect for the entire insurance term.
As of July 1, 2016, the technical interest rate for life insurance policies cannot exceed 0.05% (CHF, single-premium policies), 0.25% (CHF, other policies), 0.75% (EUR policies) or 1% (USD policies).