Barbara Ottawa assesses the decision of the Swiss authorities not to force public funds to move to full funding over the coming decades

It is really more of a philosophical than a technical problem. One of the first questions that is implicitly asked in any discussion on Swiss pension funding requirements seems to be: do you believe in full funding?

The fact is that the average funding level of public pension funds in Switzerland stood at 90% at year-end 2009, with levels ranging from over 100% to 70%, according to calculations by Swisscanto.

Under new regulations that have just passed Parliament all public funds will have to achieve at least an 80% funding level by 2050.

If they fail to reach at least 60% by 2020 and 75% by 2030 the authorities will have to pay interest on the missing fund assets.

"Funds that are already above the 80% level are not allowed to fall under their current level again," says Anton Streit, head of the pensions department in the Swiss social affairs ministry, BSV.

This bill replaced an earlier government proposal that would have expected public funds to reach a 100% funding level by the same date arguing that this would put funds on an equal footing with the private sector.

But critics including the Swiss union federation SGB interject that authorities like the confederation or the cantons are not like private sector employers as they cannot go bankrupt and will be employing people ‘forever', the so-called perenniality-principle.
This means it is justified to have a more or less a pay-as-you-go system in underfunded public Pensionskassen, say those in favour of underfunding.

The other side argues that the general public will have to pay for future fund deficits via additional taxation.

"A problem arises when larger companies that are currently still part of the local authority pension scheme leave this pension fund, perhaps because they are being outsourced," Othmar Simeon, managing director of Swisscanto Vorsorge, explains.

The new Pensionskasse then has to start with underfunding and must introduce recovery measure straight away because it now falls under the regulations for private pension funds which by law have to be fully funded, unlike their public counterparts
Last year, the pension gap in public funds was estimated at CHF31bn (€70bn) without reserves and at CHF100bn with buffers.

According to socio-economic think thank Avenir Suisse these deficits are in fact a hidden burden on the budgets as they are not fully evaluated.

In a study in 2007 - before the crisis further deteriorated funding levels - the University of St Gallen estimated that the debt of public authorities to their pension schemes actually makes up one fourth of the total deficit by the state and the cantons if the technical discount rate is lowered to a realistic 3% from the current 4%.

But some actuaries warn that there can also be overfunding in a public sector Pensionskasse as the funds will be missing from other parts of the canton's or state budget.

Furthermore, Günter Baigger, actuary at the technical university ETH Zurich, any form of investment is part financed by the state (government bonds) or the people (equities, real estate) in any case, and that a too-high asset level would put these markets under pressure.

In addition, he argues that full funding is just an illusion of security which leads into a wider debate on the usefulness of the funding level as reference figure.

Arguing against full funding requirements for public pension funds, the SGB trade union confederation also noted that without buffers the funds are likely to fall back under the 100% level any time the markets move down.

Herbert Brändli, head of multi-employer fund Profond, would even go as far as to say that "the funding level on its own is a stupid figure" as a pension fund cannot be measured on a single figure on a given date.

He added that market-related underfunding leads to sales of risky assets at the wrong times in the economic cycle.

On the other hand, Streit points out that using an average figure based on funding levels over the last three or four years to determine whether a pension fund needs to take recovery measures might disguise problems until it is too late.

Streit adds that the funding level did not use to be an issue when the mandatory second pillar was set up - it was only when equity markets collapsed in 2002 and then again in 2008 that it became a hot topic.

But a lot of the often heated debate surrounding average funding levels can also be broken down to differences in comparisons. As the figure 1 shows, even weighting the results of average funding levels can make a huge difference - at least with private pension schemes.

According to Swisscanto statistics, around 77% of public pension schemes remain underfunded as of year-end 2009.