Can Anlagestiftungen still compete?
Swiss Investment Foundations - Anlagestiftungen - are tax-exempt collective investment vehicles that were originally dreamt up by the country's pension funds themselves. Traditionally, they have been chosen by funds that were not big enough to offer segregated mandates and were meant to be tax-efficient pooled funds that would give their founders and co-founders joint say in how they were run.
As such they have formed a key part of pensions investment in Switzerland for the last 40 years. But more recently they have suffered from tax disadvantages that have turned some pension fund money towards other investment vehicles, both domestic and international.
Walter Kramer, managing director of the Swiss Conference of Anlagestiftung Companies (KGAST) that represents firms that manage around three-quarters of all assets held in Anlagestiftungen says: "Anlagestiftungen are at a tax disadvantage to investment funds in respect to value-added tax and stamp duty on transactions. Investment funds (Anlagefonds) enjoy privileges, which are withheld from the Anlagestiftungen for incomprehensible reasons."
But Anlagestiftungen have succeeded in overcoming this disadvantage by channelling their investment activity through so-called institutional funds, he adds.
"Swiss Pensionskassen pay stamp duty on their securities transactions," he says. "Because of its financial position the federal government cannot do without this and for the Pensionskassen this adds expense to the business of asset management, which has become more difficult anyway."
In addition, to stop stamp duty revenue being lost through greater use of foreign banks and markets, from July 2001 Pensionskassen, with almost every other large institutional investor including Anlagestiftungen, were declared asset traders. "Since then, they have to pay stamp duty whenever they make a securities transaction, even if this takes place via a foreign bank," says Kramer.
Against this background, investment funds have become relatively more interesting to investors. "Not only are they free from stamp duty, they are also subject to the simpler legal demands, which allows administration and asset management costs to be cut considerably," he says.
Lydia Krauss, investment consultant at Watson Wyatt in Zurich says Anlagestiftungen pay 7.5 or 15 basis points for all bonds or equities they buy or sell - the higher rate applies to domestic securities and the lower to foreign securities.
In Switzerland, investment funds do not need to pay stamp duty, but investors in a fund have to pay stamp tax when they buy or sell that fund, she says. However, investors buying or selling Anlagestiftungen do not pay stamp duty on that transaction. But she notes that a pension fund with a segregated mandate would be obliged to pay stamp duty on all trades.
There are basically four different investment opportunities for a mid-sized Swiss pension fund, explains Sven Ebeling, Mercer's head of investment consulting in Switzerland. In order of tax-efficiency, these are Swiss-registered institutional funds, foreign funds such as Sicavs, Anlagestiftungen and segregated accounts.
"So Swiss registered institutional funds are usually the first choice as they are fully stamp tax exempt - at all stages or levels, ie initial investments, in-kind delivery and ongoing transactions within the fund," he says.
It has become quite clear to the Anlagestiftungen that they are at a disadvantage, and they have responded by starting to establish funds within the individual asset categories to avoid stamp tax duty, says Ebeling. Because of this, many have effectively become a type of fund of funds vehicle.
"Besides, foreign funds are also stamp-duty exempt at the level of ongoing transactions within the fund; but stamp duty is due when a Swiss investor initially buys shares of such a foreign fund," he explains. "Clearly, if such one-time costs are amortised over three or five years, the cost disadvantage of foreign funds versus Swiss funds becomes rather small."
Although Anlagestiftungen have found ways to compensate for the tax disadvantage, setting up funds does require some organisational effort; it takes time and creates set-up costs as well as ongoing maintenance and administration costs, notes Ebeling.
"The easy short cut would be if the federal government abolished the stamp duty or at least adjusted the tax regime," he says. But he sees little hope that will happen, even though tax revenues will diminish over time, he says.
In an ideal situation, Swiss pension funds would usually choose Swiss-registered institutional funds rather than going to the international market, he adds.
But Anlagestiftungen have advantages in that they sometimes allow investors to become a co-founder (Mitstifter), which allows them to gain influence over the management of the Anlagestiftung or the respective asset category. "Some pension funds appreciate such an opportunity," says Ebeling.
He predicts that those Anlagestiftungen that do not find ways to compensate for the structural tax disadvantage will disappear, though most have started to take action.
Ebeling also points out that some Anlagestiftungen emphasise their independence in that they have no link to banks or insurance companies. Some pension funds find this a plus point. "And other Anlagestiftungen have successfully established added-value services in the area of actively executing shareholder voting rights or of taking active care of SRI issues," he says.
Krauss agrees that the ability to participate in the way the fund is run and invested is an advantage. "There are many more participation rights and more transparency than with a fund," she says. "Anlagestiftungen are legally seen as foundations, and the law does not see them as for-profit organisations. So foundations are allowed to charge fees - to cover their costs - but not to be profit-maximising organisations." This is why foundations do not issue dividends or have other ways of distributing profits, she adds.
Most Anlagestiftungen were created by Pensionskassen as a way of investing members' money as efficiently and economically as possible, says Kramer. And the vehicles still have several advantages over competitors, including cost efficiency and flexibility.
Co-Eoperation is central to the way the vehicles work, he says. Apart from having access to the foundation board, investors can also attend the annual investor meeting where most foundation board members and usually most of the investment committee is elected.
"According to the statutes, the founder can only decide on a minority of members of the investment committee," Kramer notes, adding that in many Anlagestiftungen there are no longer any privileges reserved for the founder.
And, despite the tax disadvantage KGAST is campaigning against, Anlagestiftungen still enjoy a certain tax privilege against other types of investment vehicle.
"The Anlagestiftungen are subject to the same fundamental tax situation and regulations as the pension institutions themselves," he says. They pay no income or asset tax either at a federal or cantonal level, although they are not exempt from capital transfer tax - for example, in the case of property investment.
But despite the challenges, Kramer says he is confident that the instruments will remain useful for Swiss pension funds. "With a product offering that is tailored to the needs of pension institutions, giving investors security, risk diversification and transparency, Anlagestiftungen are well-positioned, and will emerge from the challenges facing them," he says.
"The Anlagestiftung vehicle was created more than 40 years ago with the aim of making collective investment possible for pension funds within a tax-efficient, easy-to-use vehicle that Pensionskassen could understand. Since then, experience has shown that they achieved this aim in an impressive way. Anlagestiftungen are now a firm part of the Swiss system of occupational pension provision, and in recent times, they have also become a particular object of legislation."
He adds that, with assets under management of around CHF91bn (€55.3bn), Anlagestiftungen hold a substantial part of occupational pensions assets in Switzerland, as well as personal pension
provision linked to that.