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Special Report

ESG: The metrics jigsaw

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Swiss make the switch

Switzerland is a large and mature pension market in the sense that Swiss employers have typically provided a substantial pension package to employees (in addition to basic social security coverage.)

The special factor about the Swiss implementation of the three-pillar system is that the second pillar is compulsory. This comes from the company pension law (LPP/BVG) in effect since the beginning of 1985. This law requires every employer to provide a defined minimum level of coverage.

The minimum coverage prescribed in the law has a DC form, although one could make a case that technically it is really DB - of the cash balance” variety as defined in the US.

Traditionally, large domestic employers and Swiss subsidiaries of multinationals tended to have DB plans pitched at a fairly high level. The rest of the market (essentially small/medium domestic employers) tended to have modest DC plans.

This picture has changed radically and the pace of change continues. The pensions database of the Swiss Pension Forum 2000, which we established this year, is primarily composed of large domestic (both public and private) employers and international companies, the kind of employer that should have had mainly DB plans. The database shows an almost exact 50/50 split - so that practically half of the traditional DB employers are now DC employers. In fact, 25% of the whole group have either recently completed the switch or are planning to do so soon.

Three significant forces are driving this change:

q The 1995 law on vesting rights, which introduced the principle of full vesting (and portability) without any minimum service requirement. In itself the requirement to provide 100% vesting for terminating employees was not a very significant force.

However, for DB plans only, the law had a nasty “sting in the tail”. It requires that an employee entering a new employer’s pension plan has the right to purchase credit for earlier service. The purchase is based on entry salary, but (in a final pay plan) the benefit will be delivered on the basis of the future final salary.

This creates an (undesired) open-ended liability for the DB plan. A number of Swiss employers have seen this as a new and significant negative factor for DB provision. So far this factor has probably been most important in the “domestic sector”.

q Pressure from “head office”. In the multinational sector, by far the most important grouping is the US companies. The trend to DC has been very strong indeed in the US market and US companies are tending to export the trend to their international operations.

q Changes in employment patterns. Increasingly, employers no longer expect to focus on lifetime employment. They expect and want mobility in and out of their workforces. Traditional DB plans have become an obstacle to mobility (people are reluctant to leave, because they lose too much on their pension.) DC approaches suffer much less from this problem.

One final interesting note based on the forum data is that, of the large employers that have made the change, most are providing DC plans that are actually very good - as indicated by the measurement of “technical value.” They are good because they have high contribution rates and, as DC plans, these employers have definitively “locked in” to a high level of pension cost for the future.”

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