SWITZERLAND – Swiss cantons and municipalities’ pension liabilities “pose a threat” to their credit quality, according to rating agency Standard & Poor's (S&P).

The report ‘Swiss cantonal and municipal pension liabilities cloud credit quality’ say that off-balance-sheet liabilities arising from public pension funds is “a burden for the guaranteeing government” and recommends structural changes for under-funded public pension schemes.

The study, based on a sample of 11 Swiss local and regional authorities, has revealed that pension liabilities can affect their budget seriously.

The liabilities of the City of Lausanne’s pension fund, cited as a example, account for 110% of the city operating revenue. Its coverage ratio amounts to 40%, the lowest in the sample considered by the rating agency.

“Relatively speaking the city of Lausanne has the highest burden from its pension fund,”
S&P credit analyst Christian Esters told IPE.

Esters, the author of the report, said the pension fund had already been “a constraining factor for the credit rating on the government".

He called for consolidation measures to improve “structural imbalances” in under-funded pension funds to prevent cash injection by the state.

“Some local authorities are trying to bring back the covering ratio to 100%, others target something between 60 to 80%, which is not such a problem. Pension funds can function under-funded because there is a public sponsor, which will not disappear,” the analyst commented.

“But if the covering ratio continues to fall then measures must be taken” he added, suggesting higher contribution rates and an increase in pension age.

Esters explained that from the rating point of view it would be better for pension scheme members alone to bare the brunt but admitted it could be an unpopular political move, about which the government may not be keen.

Esters maintained however, that the state and the employees should share the costs to reform under-funded schemes. “They under-funded_schemes should not be an over-whelming burden,” he said.

Separately, Credit Suisse Asset Management, CSAM, said that assets under management of autonomous Swiss pension funds increased CHF12bn, (Euro 7.7 billion) to more than Swiss francs 520 billion in the first quarter of 2005.

CSAM said that its "CSAM Swiss Pension Fund Index" rose “significantly” more than the statutory requirement in the first quarter of 2005, 2.5%, bringing the performance gap down to 13.79%. The fund group added: “Though performance has been positive for the last two quarters, it is still slightly disappointing that the gap has only narrowed 1.35 percentage.”