SWITZERLAND - The Swiss canton of Zurich will inject CHF2bn (€1.7bn) into its public pension fund BVK, and it recommended a lower minimum interest rate instead of higher recovery contributions.

The CHF20bn BVK, which is currently about 82.6% funded, will be released from state control in 2014.

To reach full funding over the next seven years - as demanded by the federal government in its decree on releasing public funds - the regional government has decided to inject CHF2bn into the fund, with the lion's share of the funds coming in the form of a loan.

The government said demographic changes - as well as decisions made between 1995 and 2002 that, "in hindsight, turned out to be unfortunate" - had led to the underfunded position.

It added that the decisions, which had included a reduction of contributions from the canton, had saved taxpayers and the municipalities money over several years and that the one-off payment into the fund was a compensation for that.

Further, the government changed some of its initial recommendations made in the summer regarding recovery measures that had drawn heavy criticism from concerned parties.

Instead of hiking contributions at a funding level below 90%, members will now have to accept an interest rate 0.5 percentage points below the minimum set by the federal government until the fund reaches full funding.

The government also suggested only allowing pension increases from a funding level of 115%.

In addition, the discount rate used to determine the future development of pensioners' assets - the so-called technischer Zins - will be cut from 4% to 3.25%.

Together with the lowering of the conversion rate, or Umwandlungssatz, which is used to calculate pensions, these two measures will cost the BVK CHF1.2bn of additional funding, which will be covered from the canton's one-off injection.

The revised statutes for the BVK could come into effect from January 2013 if the regional parliament passes them.

The Zurich government stressed that if the one-off payment failed to get majority support in parliament, active members could exit the BVK, leaving behind only retirees.

The bill also includes an increase of full-time positions at the BVK from 42 to 62, mainly in the administration department.

Some new positions will also be created in the real estate department, where an independent investigation has identified a number of inefficiencies.  

Read more about Switzerland's minimum interest rate, technischer Zins and Umwandlungssatz in IPE's December issue.