Switzerland: A never-ending road

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  • Switzerland: A never-ending road

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With impeccable timing, yet another scandal has hit Swiss pensions just as the country is finalising a reform of second pillar supervision. Barbara Ottawa assesses the state of Swiss pension regulation and governance

It was the scandal around the merger of the Swiss banks Swissfirst and Bellevue that led to a first wave of tightened regulations for Pensionskassen. Back in 2005, seven Pensionskassen simultaneously dumped shares of Swissfirst days before the merger in a scandal that encompassed parallel book running and even alleged, but unproved, kickbacks.

At that time, the practice of parallel running, asset managers trading in the same shares as their employer, was not illegal but the situation was at the very least out of place. Combined with a scandal involving kickbacks related to investments in Swissfirst, this led to a change in the regulation in 2007. From then on, parallel-running was only allowed as long as the Pensionskasse experienced "no material harm".

From summer next year, both front running and parallel running will be completely outlawed - a continuation of the reaction to the Swissfirst scandal.

Further, trustee companies will only be permitted to receive mandates from a Pensionskasse under competitive conditions. The new regulations will also mean that bonus payments received for the placement of mandates have to go to the Pensionskasse rather than into an individual's personal account. Some dealings by Pensionskassen will even have to be approved by an audit board but details on this last point are not yet available. Yet another change will mean that Pensionskassen will have to disclose all external managers and advisers in their annual reports.

Many of these governance issues are already part of a charter compiled by the Swiss pension fund association ASIP and were made compulsory for all well above 1,000 members from 2009. Among those members is also the pension fund for civil servants in the canton of Zurich, the BVK.

Allegations of corruption led to the arrest and dismissal of its head of asset management, Daniel Gloor in June this year (see page 36). The charges relate to Gloor's receipt of various payments and gifts over the last decade "right up until 2010", as the public prosecutor's office in Zurich had noted in a press release issued in the summer.

Christoph Ryter, head of the Swiss pension fund association ASIP, explains the BVK had always been a model when it came to control mechanisms: "That is all you can realistically do to prevent these things from happening." Ryter says that, should the allegations prove true, it would show that no system is 100% fail-safe - or that stricter controlling mechanisms had begun to take effect.

"Additional regulations and new supervisory structures cannot help in cases which arise from criminal energy," adds Hanspeter Konrad, who co-chairs ASIP. He wants amendments to the organisational structure such as preventing individuals from having the final say in mandate awards.

Konrad explains that the ASIP-charter contains a paragraph on receiving personal gifts, invitations, bonus payments, and so on, which they would not have received as a private individual and if they do, these should go to the Pensionskasse.

"Consistent implementation of this charter - and an organisational structure to make it very unlikely that such benefits can be kept a secret - will considerably lower the likelihood of corruption," Konrad says.

Herbert Brändli, head of the multi-employer fund Profond, points out that the BVK scandal was a case of "a weak personality and criminal energy leading to members' funds being siphoned off". He criticises suggestions made by Ecofin co-founder Martin Janssen to limit investments of Pensionskassen to passive mandates. "Passive investments deprive investors of control over their allocations - what Swiss pension funds really need is a professionalisation on the management level," Brändli adds.

The financial department of the Zurich canton government also included a remit to check "which organisational preconditions could have abetted corruption" in its investigation into the BVK scandal. Whether the findings will lead to further regulatory changes remains to be seen.

New supervisory structure
The reform of the supervisory structure will meanwhile "bring new methods and new solutions for supervising Pensionskassen," Konrad believes. He adds that the system of regionalised supervisory authorities is a better model than the initially planned centralised supervision, which would have had to cover over 2,500 Pensionskassen.

A few weeks ago, the Swiss parliament had decided against making Pensionskassen an additional responsibility of the financial supervisory commission Finma. As Konrad says, pension funds are long-term investors based on a non-profit structure, and stress tests running on an annual basis do not apply. "In addition, the stress-tests and risk models issued by the Finma did not save us from the last financial crisis," he adds.

Despite preparations for a regionalised supervisory structure, the medium-sized canton of Solothurn has recently left negotiations with neighbouring cantons Basel Stadt and Basel Land on supervisory co-operation.

"The canton of Solothurn wishes to continue to organise supervision on a cantonal level, although later co-operation with other cantons is not ruled out," says Kurt Flüeli, head of the second-pillar supervisory authority in Solothurn (ABVS). He says that advantages of a "cantonal solution", include closeness to clients, familiarity with conditions in the canton and co-operation with other authorities.

But Solothurn is not the only canton to keep its current supervisory structure: the cantons of Geneva and Bern will not join regional supervisory authorities either. "The cantons can form joint regional authorities - but they do not have to do so," comments Barbara Brosi, heading the reform of the supervisory structure at the Swiss interior ministry.

The cantons Basel Stadt and Basel Land as well as Waadt, Jura, Neuenburg and Wallis are currently working on implementing a joint supervisory structure, which - according to the new law - has to be set up as a legally independent institution.

No co-operation plans have yet been announced by the cantons Aargau, Freiburg and Tessin.

Several cantons already have joined forces when it comes to supervising Pensionskassen and these structures can be continued under the new regulations: Luzern, Uri, Schwyz, Obwalden, Nidwalden and Zug (since 2006), Appenzell Innerrhoden, Appenzell Ausserrhoden, Glarus, Graubünden, St Gallen and Thurgau (since 2008), and Schaffhausen has signed a cooperation with the canton of Zurich.

There will also be one centralised super advisory commission (Oberaufsichtskommission), which will have the power to issue standards for all regulators and also serve as arbitration board in case of conflicts.

"The members of this commission will have to be elected in 2011 in order for the commission to be able to start work on 1 January 2012", Brosi points out.

The commission will also directly supervise the so-called Anlagestiftungen, investment foundations for Pensionskassen, the Sicherheitsfonds for insolvency protection of Pensionskassen, and the Auffangeinrichtung (AEIS), the default fund.

Recurring demands
Another part of the structural reform, aside from the changes to the governance regulations and the supervisory structure, is greater flexibilty for older workers. Pensionskassen are now able to continue paying into the funds of older workers until age 70 if they continue working.

Moreover, members who reduce their work hours from the age of 58 can continue to pay the same level of contributions into the Pensionskasse as before their hours were cut.
All these amendments address long-standing criticisms and unsolved questions regarding the second pillar but others remain untouched - namely the politically delicate and hugely influential coversion rate discussions.

ASIP-head Konrad recently renewed his calls for relieving the government and parliament off their powers to decide on the minimum rate and the conversion rate in the second pillar and leave it up to the Pensionskassen to decide on these parameters - "as it is already done in Liechtenstein".

"Asset management has become such a complex issue that the decision about important fundamental parameters should more and more be left to the experts in the Pensionskassen," he adds.

However, Konrad does not want to see this statement as a criticism of the system of lay trustees on the board of Pensionskassen as it is an important part of the structure of the second pillar to have both employer and employee representatives on those boards. And for them ASIP is offering training courses.

But so far there are no signs that the authorities are willing to give up these powers in the near future. Perhaps this will change with the next structural reform, or the next scandal.

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