A growing number of Switzerland's more than 3,000 pension funds are joining forces and entering into collective foundations (Sammel or Gemeinschaftsstiftungen) in an attempt to gain economies of scale, according to Christian Zeitler, country head of Austria and Switzerland at F&C Asset Management.

Zeitler believes that the biggest savings could be achieved if employees could choose which pension fund to join. "This would create competition, which is lacking at the moment," he says.

Christian Raubach, managing partner at private bank Wegelin & Co, believes that despite the malfunctioning of the first pillar pay-as-you-go system, the Swiss pensions industry is well established, well organised and provides the individual cantons with a lot of autonomy.

"But the Swiss regulator made the mistake of not creating fewer and larger pension funds like in the Netherlands," he says.

"This resulted in many smaller and less or insufficiently sophisticated pension funds with high operating costs. But we are now stuck with this model because the vast number of pension funds have fed and are still feeding the industry and its asset managers, and this is combined with a lack of driving force behind a reform. In terms of asset allocation, several larger pension funds understand that the current framework with its home bias and limits is not very modern. Fortunately, the situation is changing and new asset classes are being embraced."

Chief investment architect at Pictet asset management Rolf Banz says the consolidation of pension funds has long been a political hot potato, adding that the topic of a free choice of pension funds was not so long ago again rejected by the Swiss government.

"But it would be unrealistic to ignore the fact that an employee of a company with a chosen insurance solution is in all likelihood not going to have the same kind of return and benefits - particularly with a defined contribution scheme - than it would with a bigger and more sophisticated scheme that had access to a much broader range of asset classes," he says.

"The trustees of very small schemes tend to be quite removed from the financial markets and as a result will have a strong allocation in traditional asset classes and direct property that is in close proximity to their offices. That is why, as it becomes more obvious that larger pension funds do better than smaller pension funds because of fewer fixed costs and broader opportunities as well as more access to expertise, I expect the pressure for consolidation to grow."

Zeitler also believes that with Switzerland-based companies being obliged to set up occupational schemes, pension funds of companies of up to 20-50 people would benefit from merging or joining a collective scheme.

But he does not see a future for individual pensions accounts in Switzerland. "The system as it is works very well at the moment," he says. "Employees are only unclear about the exact size of their pension in the first-pillar state pensions. The second pillar occupational pension funds and the third pillar personal pension already work in a similar way to individual pension accounts with employees receiving an annual statement. The government could put all of this together into individual pension accounts, but as this would be a major change in strategy. It is unlikely."

Another issues that preoccupies the Swiss pensions industry is the guaranteed minimum rate that pension funds must credit to paid-in savings on an annual basis, and which will increase to 2.75% from the current 2.5% on 1 January 2008.

"The minimum interest is very unhealthy for pension schemes to have," Banz says. "A 25-year-old employee, for example, does not care about the insurance on a year-by-year basis. Employees only care about what they have at 65. And again this is an argument that may at some point lead to demand for individual retirement accounts because if it is an individual rather than a commingled pensions account, any strategy can in principle be pursued according to personal preferences. But despite the theoretical modus, I am against individual retirement accounts because one should not underestimate the importance of the existence of the pension fund that is linked to the employer because employers want to continue to attract the people that will make sure that their pension fund looks healthy."