SWITZERLAND - Next year's minimum return rate required from Pensionskassen might be up to 1 percentage point lower than the current rate, at the same time as Switzerland is widening the use of the "prudent person principle".
Both employer and union representatives of the governmental BVG commission have reached a rare agreement over the minimum return rate and accept the existing rate of 2.75% may need to be lowered in light of the recent market conditions.
That said, while employee representatives want to see the rate slashed to 1.75% to allow Pensionskassen "to make riskier investments with potentially higher returns", unions are warning such a low rate will "undermine people's trust in the system" and they have suggested a rate of 2.25%, having already lowered their demand from 2.5% demanded in June.
The commission's proposal to the government, which will now have to decide on the 2009 rate, is a compromise of 2%.
Christoph Ryter, president of the Swiss pension fund association ASIP told IPE the body "welcomed" the 2% proposal as a "step in the right direction" but would have preferred a further reduction to 1.75%.
"We have long demanded the creationg of a formula for calculating the minimum rate using 70% of the 7-year rolling returns of 7-year government bonds," he explained.
The debate on the minimum return rate which every fund has to achieve has long been a very political and criticised one. (See earlier IPE article: Unions attack slashing of minimum interest rate)
Meanwhile, the government has passed new investment regulations for Pensionskassen which are putting more emphasis on the prudent person principle and the responsibility of heads of Pensionskassen.
The prudent investor principle has been in place before but more of the processes demanded by trustees and or CEOs have now been written into law, confirmed Joseph Steiger from the department for occupational retirement provision at the Swiss social ministry.
"This is already in place at a lot of Pensionskassen," he added.
Ryter agreed "most funds will not really be affected by the changes".
Ryter noted alternative asset classes have now become part of the regular asset categories rather than being specialist investment vehicles.
"But that has not stopped funds from investing in them so far," he pointed out.
Investment limits such as a 30% cap on domestic equities and a 25% cap on foreign equities have also been simplified to a 50% cap on all equity investments.
However, the Swiss government decided against scrapping all limits completely as this "might have sent the wrong signal" and because "the limits are still a point of orientation" for many trustees.
In total, the number of investment limits to be obeyed has been reduced from 19 to 12.
One of the most pronounced changes in investment limits is the lowering of possible real estate investments from 50% domestic and 5% foreign to 30% in total
"The idea was to reduce the current weight of real estate investments which were perceived as too high by all parties involved," said Steiger.
He stressed industry representatives had been part of the revision "at all times" and "they did not see any problems" with the lower real estate investment rate.
He added funds can surpass the legal limits if they give good reasons in their annual accounts
Several experts as well as the Pensionskassen federation ASIP had long demanded an overhaul of the regulations. (See earlier IPE article: Swiss Pensionskassen 'suffocated' by regulation)
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