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Impact Investing

IPE special report May 2018

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Pensions in Switzerland: Drawing a line under supervision

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Most people believe that the funding level is not the ideal benchmark to assess the financial strength of a Swiss Pensionskasse. The funding level figure, Deckungsgrad in German, that Swiss second pillar funds are obliged to report does not take the age structure of the members into account, or any discount rates applied by the fund. 

The concept of a risk-based funding level, as promoted by the Zurich-based consultancy PPCmetrics has not yet taken off (see separate article in this section), but in future Pensionskassen might have to report other benchmarks. The federal-level supervisor, the Oberaufsichtskommission (OAK), is planning to change from its current reactive approach to a more pre-emptive one by assessing certain risk parameters. 

As an initial step, OAK has worked with the Swiss Association of Pension Fund Experts (SKPE) to create a ‘tool box’ for each pension fund to check its own financial situation. This will contain calculations similar to a stress test, will show likelihood that the expected return will be achieved, how the age structure among members influences liabilities, and recovery plans. 

For its annual report on the financial stability of the Pensionskassen in the Swiss second pillar, the OAK makes certain assumptions for a risk assessment across the whole system. “As this is not intended to assess individual funds’ risks, their names remain unpublished, but each Pensionskasse receives the information that is collected and calculated on its behalf in order to check inputs and outputs of the study,” says Pierre Triponez, president of the OAK. 

Christoph Ryter, president of the Swiss pension association ASIP, fears that the supervisory body might make some reporting of the benchmarks mandatory for Pensionskassen, even if not all of the calculations are appropriate for every fund. “What is better: a too high funding level with insufficient funding -– with a likelihood of the funding level dropping – or a lower funding level with moderate benefit promises?” That is the rhetorical question he asked in Swisscanto’s 2014 pension fund study to demonstrate the diversity in system and that there can be no one size fits all-approach. 

Nevertheless, Ryter says he welcomes OAK’s efforts to obtain an estimate of the financial situation of Pensionskassen by means of a questionnaire each January on their funding situation, pay-out promises, recovery ability and investment risk. Prior to the structural reform, the official prognosis on the health of the Swiss second pillar was published with an annual delay. So while ASIP supports OAK’s exercise, it fears that OAK or the regional supervisors might take it a step further without legal groups. “Fulfilling a certain parameter for a short-term view might distort the long-term strategy,” Ryter says. 

At the think tank Avenir Suisse, director Jérôme Cosandey shares Ryter’s doubts but applauds OAK’s attempt to move from a supervisory approach based on historic data. However, Cosandey sees a conflict of responsibilities: “The board alone is still responsible for the Pensionskassen’s risks, which it should assess together with the actuary – this is certainly more relevant than reporting four or five risk parameters.” Using the same figures, Cosandey also believes that OAK might make a different assessment of risk than a pension fund’s internal assessment. 

Triponez says he is aware of the diversity of Pensionskassen. “They must not be painted with one broad brush,” he says. “Pensionskassen will still have the full range of tools provided under the legal framework available to assess their risks. Actuaries will remain central in assessing the individual situation of each Pensionskasse.” 

OAK “does not want to take over the role of the Pensionskassenexperte,” Triponez adds, although he affirms that these experts will have to deal with the new risk assessments. OAK and the chamber of pension actuaries are in constant dialogue, he says, and feedback has generally been good. 

“There will be a certain pressure on some funds once more information is published,” Triponez adds, pointing to greater transparency and comparability in the competitive market. But, he is convinced a reasonable approach to implementing this new process will be found. 

Roger Tischhauser, director of the supervisory authority of the canton of Zürich (BVS), believes there is no doubt that mandatory risk standards will be introduced. Most Pensionskassen already consider multiple risk parameters, so this will simply formalise best practice, he says: “This approach helps to increase legal certainty and trust in the Swiss pension fund system.”

To keep the approach practical, Tischhauser suggests exempting smaller Pensionskassen from the exercise. And reporting should not be mandatory for all risk parameters. “It is the OAK’s remit to put this into the right legal form. It is then up to the regional bodies to implement it.”

This is where the main problem lies for Ronald Schnurrenberger, chairman at the CHF9bn PKE pension fund for the Swiss energy sector. He is not convinced the supervisory set-up with a top supervisory body and cantonal or regional bodies makes sense. “A lot of the very good things that OAK has done so far would have actually fallen under the remit of the local supervisors,” he says, although he concedes that OAK has facilitated a national solution to certain issues.

“The argument that regional supervisors are closer to the Pensionskassen has no basis because for me it is more important to have a supervisor that is closer to the issues in the second pillar than one that is locally closer,” he notes, adding that central supervisor would be preferable. 

The cantonal authorities have mainly employed legal specialists hitherto and are only now recruiting experts from different fields. OAK, on the other hand, already employs experts from different fields, many directly from Pensionskassen like the former CEO of the pension fund of the City of Zurich, Vera Kupper Staub.  

Overall, the direction of travel is clear. “More regulation and a limitation of flexibility for Pensionskassen can probably not be avoided altogether,” says Triponez, notwithstanding OAK’s efforts to introduce “proportionate” regulation and maintain dialogue with institutions. “However, as the experience of cost transparency has shown, useful regulation may also lead to innovation in the pension industry, which will in the end create value for the individual member of the pension fund.”

“Overregulation is a constant problem,” says Ryter, conceding that OAK is by no means the only source. “Every time a problem in the second pillar occurs, a new regulation is introduced creating more problems,” he says. 

Schnurrenberger criticises the “overpolitisation” of the occupational pension sector: “Every politician, no matter from which side tries to co-opt the second pillar for their political campaign,” he says. 

And looking further ahead, the proposed reform package Altersvorsorge 2020 will doubtless introduce new regulatory requirements.

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