L I E C H T E N S T E I N ’ S N O N - B A N K F I N A N C I A L S E C T O R Financial Stability Report 2021
vency ratios across the distribution of insurance undertakings in Liechtenstein. By the end of June 2021, all insurance undertakings fulfilled the solvency capital requirements, with the minimum level amounting to 128 %. In contrast to other countries, life insurances in Liechtenstein hardly suffer from the low interest rate environment, as guaranteed products are rare in Liechtenstein and the lion’s share of capital investments is attributable to investments managed for the account and risk of policy holders as part of unit-linked ( i.e. fund-linked ) life insurance. In this context, managed capital in the context of unit-linked life insurances in Liechtenstein amounted to approximately CHF 22 billion at the end of 2020. Nevertheless, similar to the situation in other countries, insurances in Liechtenstein are also faced with an increasingly challenging environment in terms of profitability in the last few years.
Pension schemes Liechtenstein’s pension system is built on three pillars. Pillar one includes old age, disability and survivors’ insurance and is administered by the state ( A HV / I V ). This public scheme is complemented by a mandatory occupational pension provision ( pillar two ), and private pension provision on a supplementary basis ( pillar three ). The first pillar aims at securing the subsistence level of the insured person and family members in the event of old age, disability, and death. The second pillar is geared towards maintaining the accustomed standard of living after retirement, while the third pillar is an individual, voluntary pension provision, serving to close provision gaps that cannot be covered by the first and second pillars.
For the public pension system ( A HV ), the year 2020 was characterized by solid investment income and an extraordinary contribution from the state. Following a turbulent year 2018, with the strong financial market correction in December resulting in significantly negative returns in the same year, the return on financial assets amounted to more than 9 % in 2019 in light of the positive financial market development, leading to a significant increase in financial reserves. Although the COVID-19 crisis was associated with a sharp drop in financial markets at the start of 2020, the subsequent recovery led to positive investment income for the public pension system for the whole year, with the total return on financial reserves amounting to 2.6 %. While the return on financial reserves was lower than in the previous year, financial reserves also benefited from a small increase in contributions ( + 1.0 % to CHF 270.2 million ) and an extraordinary state contribution amounting to CHF 100 million, increasing the public contribution to a total of CHF 130.4 million. At the same time, total expenditures also increased by + 2.6 % to CHF 312.2 million, resulting in a total surplus of CHF 170.5 million. Structural reforms in previous years imply deficits in the public pension system in the years ahead. As part of the fiscal consolidation package following the public budget deficits in 2012 and 2013, a pension reform was enacted in Liechtenstein. This reform increased the retirement age by one year to 65 and raised the contributions from employers and employees. At the same time, however, it also decreased the state contribution to the public pension system significantly. While the year 2020 marked an exception with an extraordinary state contribution of CHF 100 million, not least due to a positive one-off effect in tax revenues ( see chapter 3 ), it is therefore expected that the expenditures of the public pension system will exceed revenues in
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