Switzerland: Devil in the detail
The Swiss supervisor has put pressure on the asset management industry to increase transparency. Now the authorities must move to achieve full disclosure, finds Barbara Ottawa
At a glance
• The Swiss total expense ratio only covers audited, calculated figures.
• Providers of opaque vehicles have bowed to pressure to provide more data.
• Further analysis is needed but authorities need time to collect data.
In their annual reports for 2013, Swiss Pensionskassen had to disclose total expense ratios (TER) for their portfolio investments. Vehicles for which no cost reporting had been approved by the supervisor had to be named and quantified in an annex to the annual report. This was soon referred to as the ‘black list’.
Since then, no official data on costs among the 2,000 pension funds has been published. The main reason for this is that the data is not yet available. The supervisory body, the Oberaufsichtskommission (OAK), has to rely on data collected by the federal statistics office. But this is only available with an 18-month delay, as all the figures filed by all pension funds have to be filtered.
Therefore, OAK decided in the summer of 2016 to postpone disclosure and analysis of returns in relation to costs until further data becomes available.
The initial report on cost levels revealing a lack of transparency had been done by Swiss consultancy firm c-alm, having been commissioned by the Swiss social ministry BSV.
In its 2011 study, c-alm found the average cost level reported by Swiss Pensionskassen was 11bps. Only direct costs were reported, which only made up less than half of the total costs. Calculations by the consultancy revealed an actual cost level of more than 50bps, including hidden transaction costs, mainly in collective vehicles.
The year after the new law on cost reporting came into effect, the average cost level reported by a sample of pension funds was 40bps, according to the Swiss pension fund association ASIP.
This disclosed TER includes costs in transparent collective investment schemes. But it still leaves out transaction costs and taxes in collective schemes, costs in opaque collective schemes, as well as implicit transaction costs and taxes on the top investment layer.
While c-alm and other stakeholders expect some of these costs to be included over time, the consultancy warned about including too many estimated costs not calculated by the asset managers.
“A one-sided focus only on aggregated TER levels leads to wrong incentive structures for pension fund managers as it favours asset classes with low TERs, which may not necessarily generate high net returns”
In contrast to the Dutch system of cost transparency (total cost ownership), the Swiss model is solely based on audited figures derived from calculations of TER-models approved by the supervisor.
Estimates by pension funds can only serve as additional information, not as basis for the TER-reporting. With this, the authorities hope to render the reported figures comparable – even if it means there will never be full cost transparency.
Another difference between the two systems is who is responsible for delivering the information: while in the Netherlands the pension funds are held accountable for providing the figures, the Swiss supervisor put pressure on the sell-side.
This was mainly achieved by introducing the ‘black list’; asset managers considered it bad for their reputation to be on the list. Pension fund boards also had an incentive to ensure the list was not too long.
During the consultation phase for the new framework, the Swiss asset management association (SFAMA), the association of private equity vehicles (SECA) and the conference of heads of the investment foundations (KGAST) devised ways to calculate such a total cost ratio. All the models were approved by OAK, considerably improving transparency in cost reporting.
The only cost-return-related report to be published so far is a survey conducted in spring 2016 by the University of St Gallen of 80 large private and public pension funds, commissioned by SFAMA.
The report noted that the average TER ratio among the participating pension funds was quite high at 60bps, of which about three-quarters is portfolio management costs. The rest is made up of administrative and other costs.
But the study shows a “strongly positive” correlation between portfolio net returns of 6% in 2015 and the level of costs, mainly attributable to private-market investments.
“A one-sided focus only on aggregated TER levels leads to wrong incentive structures for pension fund managers as it favours asset classes with low TERs, which may not necessarily generate high net returns,” the report warned.
Indeed, immediately after c-alm’s research into previously hidden costs was published in 2011, some trustees demanded full divestment from ‘expensive’ vehicles reporting a high TER.
But this knee-jerk reaction has slowly evolved into a healthy questioning of fee levels. Nevertheless, a deeper debate on costs can only start once a wider analysis has been done and more data is available to stakeholders.
Timeline on Swiss cost disclosure
• 2010: government commissions c-alm to do a study on cost levels in Pensionskassen.
• 2011: study is published and leads to major debates.
• 2013: supervisor Oberaufsichtskommission (OAK) amends investment regulations for Pensionskassen (BVV2) to include Article 48a demanding reporting of a total expense ratio (TER) or disclosure in a black list.
• April 2013: OAK publishes additional decree (Weisung W-02/2013) with clarifications. Additionally, TER costs in transparent collective investment schemes (such as investment funds, trusts, investment companies) are to be disclosed.
• 2012-14: before the new law was passed alternative investment associations rushed to present the OAK with TER concepts for their investment vehicles, and they were approved, including those for private market vehicles, real estate or funds of funds.
• 2014: first TER disclosures in pension funds’ 2013 annual reports.
• 2016: Swiss asset management association SFAMA publishes first survey-based evaluation of the cost factor in Swiss pension funds.
• Future: OAK is expected to disclose cost figures for more than 2,000 pension funds.