Pension funds should be more realistic about evaluating liabilities, André Tapernoux tells Barbara Ottawa
After four years at the Swiss Federal supervisory body, the Oberaufsichtskommission (OAK), André Tapernoux is back at his former employer, Mercer. “Not that much has changed but there are a few things I have to catch up on,” he says. Now heading Mercer Switzerland’s retirement business, he has to implement the regulatory framework the OAK has outlined. Tapernoux was part of the first “management crew” at the supervisory body that was created under the structural reform programme.
“I will not have ‘insider knowledge’ prior to other market participants,” he says. “But it will certainly help me as a consultant to know a supervisory body from the inside, know how they operate and which problems they have to cope with – such as having to go through multi-page expert opinions which are difficult to understand.”
Overall, he admits it is “too early to tell how much of a success the re-structuring of the Swiss supervisory landscape will be”. But adds: “There are very positive developments such as all supervisors talking about general topics in the Swiss pension landscape, for example, standards for multi-employer funds, or how to evaluate retiree-only pension funds”.
“From an adviser’s point of view, it will be very good to have one unified set of regulations on such topics rather than nine different ones” However, at the moment some supervisory opinions are still differing greatly.”
The need for consultation
What Tapernoux remembers from his earlier career as a consultant is that it was more difficult to convince Swiss Pensionskassen of the need for an external adviser. By law, all pension funds have to get advice from a certified Pensionskassen-Experte and many did not think it was necessary to pay consultancy fees on top of that. “Now, there is an evolution of pension funds seeking advice on their liability side in connection with their investments. They are looking for strategic consulting beyond the usual expert’s opinion.”
The questions now asked by Pensionskassen are: “How will the liabilities change over the years? What are the consequences? And how can we counteract those? So, all in all, pension funds are less ‘immune to consultants’, mainly because the pressure has increased.”
Among those that feel it the most are pension funds with a lower funding ratio, a high quota of retirees or an employer reluctant to make additional contributions. This includes public pension funds, as regional and federal authorities often have a tight cap on additional funding. “Many Pensionskassen are considering lowering the conversion rate in order to get some breathing space. And we at Mercer support this. We are not extremely pessimistic when it comes to future returns but it is good to create room for a buffer.”
Tapernoux – in line with the OAK’s debate on issuing a list of risk parameters – stresses the importance of a realistic valuation of liabilities: “The funding level alone is not a meaningful benchmark to identify the correct technical parameters but it helps as a comparison. In the past it had been relied on too much, but for a more sustainable alignment of the technical parameters the expected return has to be taken into account.”
“Many Pensionskassen are considering lowering the conversion rate in order to get some breathing space. And we at Mercer support this. We are not extremely pessimistic when it comes to future returns but it is good to create room for a buffer”
Overall, Tapernoux sees the current regulatory framework for dealing with underfunding and introducing recovery measures as “flexible enough to give Pensionskassen some leeway”. All the regulatory parameters are frequently commented on or – where possible – adjusted by the Schweizerische Kammer der Pensionkassen-Experten (SKPE). “It is important that every adviser and every Pensionskasse individually sets the parameters fitting their needs and introducing a sensible threshold for underfunding,” he says. He calls on all stakeholders to identify long-term, sustainable strategies for reducing liabilities: “It should not be just short-term measures, but a strategy which can be explained to active members so that they can be sure they will still be receiving a meaningful pension at the end.”
Regulation and other burdens
“It is true there are a lot of regulatory requirements and this creates problems especially for smaller Pensionskassen,” says Tapernoux. “Some of the requirements are considered to be only formalities, without improving the security or the sustainability of the pension provisions.” He also confirms there is a concern that the Altersvorsorge 2020 (AV2020) reform package might increase this burden: “Overall, the package is acceptable from a second-pillar viewpoint, but it will bring further regulations.” And this, in turn, will speed up the growing trend towards consolidation in the Swiss second pillar. The number of funds has already halved from its 1985 peak of 4,000 when the manadatory second pillar system launched.
“But, in fact, Pensionskassen are currently more burdened by the low-interest-rate environment rather than pending reform,” Tapernoux points out. “Most large pension funds are managing contributions well above the mandatory level and can therefore lower their technical parameters beyond the legal minimum.” The BVK has taken a major step in cutting the conversion rate to below 5% and was one of the first Pensionskassen to do so.
According to Tapernoux, the regulatory framework regarding investments is also flexible enough to allow for higher allocations to alternatives. “But many Pensionskassen are not making use of this freedom, very often because they think the costs are too high.” This belief has been strengthened with the introduction of mandatory reporting of the total expense ratio. “But, as a consultant, I would hope that more advisers and trustees identify investments where higher costs are justified.”
Other trends identified are less of a concern for Tapernoux. “For one, the so-called 1e-plans – that is, offering further individualisation of investment risks in pension funds – can only be applied for people earning more than CHF126,000 (€114,000) annually – so, in fact, it will only affect a small share of the system.”
“And regarding the debate on flexible pension payouts, it has to be said that, in practice, many models have not had the hoped-for effect. Much more flexibility would be necessary to improve a Pensionskassen’s long-term funding level. But this contradicts the wish for guaranteed pensions.”
Instead, Tapernoux believes the current model of granting top-ups to pensions will be continued and applied more widely: “Pensionskassen will become more cautious in their pension promises and make additional payments if possible, after replenishing their buffers.”