SWITZERLAND - Swiss pension funds should see their real coverage ratio as 10-15% lower than their technical estimate, a consultant has warned – calling for a “predictable minimum interest rate policy”.

Franz Schumacher, a partner of the consulting firm PPCmetrics SA, warned against over-optimistic estimates at a conference organised by Pictet Asset Management.

Schumacher said the prudent principle - which in most European jurisdictions consists on overstating liabilities and understating assets - is reversed in Switzerland.

“Overstating assets and understating liabilities is a taboo, except that it happens in Switzerland,” he said.

Swiss pension funds tended to rate their assets at market prices while their future liabilities are discounted at a fixed four percent rate.

The result of this calculations does not give a fair representation of their real financial situations, Schumacher said. Interest rates risks are neglected, due to the use of the stable rate of four percent, he said.

“As long as capital markets rates are below four percent, the application of a technical yield of four percent clearly understates the net present value of liabilities,” he argued.

“Lower interest rates require more capital,” he told delegates. And the asset-liability gap is not likely to go away with time, he warned.

“Without better information you have to expect the gap will appear over time. It is not a fake, it will not go away because it is not artificial.”

An accurate calculation of the interest-rate risk for defined contribution schemes, however, involves using the minimum interest rate, set by the Swiss federal council.

The council's rate setting patterns are not clear, Shumacher said - suggesting that the council define a minimum interest rate policy.

He said: “Dear Federal Council, please define a predictable minimum interest rate policy in order to allow pension funds to define a solid investment strategy to match their liabilities.”

“All political parties and interest groups should work together to find a solution.”