A Swiss public pension fund could be split in two under a proposal to “draw a line” under its financing problems.

The CHF4.1bn (€3.8bn) Pensionskasse des Staates Wallis (PKWAL), the fund for the Swiss canton of Valais, has a deficit of more than CHF1bn and is faced with gloomy cash flow and return prospects.

The proposal to split the fund was developed by a working group that was launched by the cantonal government last year to come up with ideas for restoring the pension fund’s long-term financial equilibrium.

The working group said the pension fund was in an extremely complex and risk-laden situation. Changes at the financing level would provide some reprieve, it said, but would fail to return it to financial health and secure its long-term future.

Instead, the working group suggested that the current pension fund be converted into a closed fund covering pensioners and members who belonged to the fund before January 2012. A separate, open fund should be created for those who joined the fund after January 2012. The new fund would be fully capitalised, without a guarantee from the state.

When PKWAL switched from defined benefit to a defined contribution scheme in January 2012, a guarantee was granted by PKWAL, which a legal opinion has deemed made the state of Valais and its affiliated institutions responsible for plugging the pension fund’s financing gap.

“In light of PKWAL’s difficult financial situation, the working group is convinced of the need for a far-reaching and sustained reform of occupational pensions for the insured,” the Wallis state council said in a statement.

“The working group is seeking a new paradigm in order to draw a final line under the financing problems of PKWAL and to be able to look to the future.”

The proposal to create two pension funds was intended as a strategic measure to solve PKWAL’s problems in the long-term, without prejudice to the interest rate paid on members’ accrued savings capital, the working group said.

The cantonal government has commissioned the working group to analyse the financial, technical and organisational aspects of its proposal in-depth. A final report is expected for the end of the year, based on which the government will make its decisions.

The government said it would leave an adequate amount of time between the announcement and entry into force of the measures it decides.

PKWAL’s management board has decided not to take any measures to reduce the conversion rates, which are applied to members’ assets to calculate their pension, before 1 January 2019.