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Swiss pension scheme Publica to cut conversion rate

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SWITZERLAND - The Swiss public fund Publica - the 24th largest pension fund in Europe, according to IPE's Top 1000 Pension Funds survey - is set to lower its conversion rate from 6.53% to 6.15% in the wake of new longevity assumptions published by the government last year.

The change will take effect 1 July 2012.

Werner Hertzog, director at the CHF33bn (€25.7bn) fund, said: "We are probably the first ones to make this adjustment, but it is very likely others will follow."

The fund estimates the change will allow it to save as much as CHF90m per year.

The cut will be applied to all people retiring after 30 June 2012. For those already retired, buffers will be dissolved to ensure their pension will not be cut, Publica said.

In recent years, the fund had put aside CHF480m in buffers for a conversion rate cut and another CHF870m for adjustments to the longevity tables.

The conversion rate is used to calculate pension benefits during the payout phase. Last spring, it had been the topic of a heated political debate in Switzerland.

In a March referendum, more than 70% of Swiss voters decided against a further lowering of the minimum conversion rate to 6.4% by 2014 from the current 7% for men and 6.95% for women.

Prior to the crisis, parliament had already decided on an unchallenged cut in the conversion rate to 6.8% for both sexes by 2014.

However, as a lower conversion rate can be applied to assets from contributions beyond the legal mandatory minimum, the actual average conversion rate in the Swiss second pillar is already 6.74%.

"Only around one-fourth of our assets is for mandatory benefits," Hertzog pointed out for his own fund.

He added that Publica would not be the fund with the lowest conversion rate, as some funds already have lower rates.

"They have used different assumptions, but, obviously, they came to the same conclusion," he added.

Both the discount rate and the strategic asset allocation will be unaffected by this adjustment, Hertzog confirmed.

Unrelated to the conversion rate cut, the collective fund has split its portfolio into retirement schemes with active members and closed schemes that only have retired members.

Hertzog said: "It took some time to implement this step, but now we have different asset allocations for the two portfolios, as the liabilities are completely different."

For 2010, Publica reported a 5.1% return.

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