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Top 1000 Pension Funds: Eyes on next reform

Swiss funds are still dealing with structural reform to occupational pensions. New governance rules and the next reform are already on the horizon, says Barbara Ottawa

The Swiss mandatory second-pillar system is undergoing a variety of reforms, with the next already in sight.

One problem inherent in the structural reform of 2011 was governance structures and the creation of the new top-level pension fund supervisor. This measure did not lower the legal minimum conversion rate used to calculate pension payouts from accrued assets.

After an overwhelming ‘no’ vote by the Swiss public on a further reduction of the rate to 6.4% in March 2010, the government drew up structural reform to strengthen people’s faith in the second pillar.


But all experts, including government representatives, agreed that the conversion rate is the main problem, even though it is to be lowered from 7.2% to 6.8% in 2014.
In reality, however, most large pension funds managing above the mandatory level (Überobligatorium), in addition to the mandatory contributions by employers, have already lowered the conversion rate below 6%.

They can offset the rate against their mandatory assets where they have to offer the legal minimum conversion rate. But this will only work for a certain time before even pension funds with a high level of above-mandatory assets have to start using active members’ assets to keep the pension payout levels.

This is one of the ‘unintended transfer effects’ in the second pillar that the government will investigate in research on the conversion rate as it prepares its next major reform. There will also be a study on whether a reasonable long-term rate of return can serve as the basis for the minimum conversion rate.

Interior minister Alain Berset, in office since January 2012, wants to lower the minimum conversion rate over a four-year period by 20bps each year to 6% as part of a comprehensive reform of both the first and the second pillar.

Of course, it is probable that unions and left-wing parties, which initiated the referendum against the rate cut last time, will again aim to thwart such plans. But the industry is hopeful that it will be able to prove the validity of its arguments next time round.

Following the referendum in 2010, stakeholders, including the pension fund association ASIP, argued that the vote was, in effect, about much more than the conversion rate, since the campaign focused heavily on the question of profits and bonuses of insurers. In addition, both government and pension funds believe that the electorate can be convinced about the necessity of a rate cut if sufficient measures are presented to cushion the impact.

According to the Altersvorsorge 2020 proposal, “additional financing” would be transferred to the second pillar from the Sicherheitsfonds BVG (Fonds de Garantie, LPP), the pension protection vehicle into which each pension fund pays contributions.

Another change to the system is the proposal to set the minimum interest rate each pension fund has to guarantee at the end of a year based on average rates of returns. Currently, it is set a priori for the next year based on return assumptions.

By the end of 2013, the BSV, which is part of the interior ministry, will draw up a legal proposal to be published for consultation afterwards. At the end of 2014, the government is expected to present a law based on the proposals and opinions.

Meanwhile, it has extended the deadline for public pension funds to become entities independent of public authorities to the end of 2014.

As part of the structural reform, cantons and municipalities had to decide whether to target full funding for their pension schemes or continue to guarantee underfunded plans.
However, this year it has become clear that not all public funds will be able to set up these new structures by the end of this year, but the government stressed this was “not due to any major failures” on the part of the authorities.

The power of the Swiss electorate was demonstrated again in March when it voted overwhelmingly in favour of a motion by parliamentarian Thomas Minder to curb “excessive” manager payments in listed companies.

In effect, this will legally oblige pension funds to exercise and report on their voting rights at AGMs. However, the government draft also allows schemes to abstain if it is “in the interest of the pension fund members”.

The framework for these decisions has to be set down by the pension fund trustees who are also liable for the shareholder engagement policies.

A draft was published for consultation in summer 2012 and this is scheduled to come into effect in January 2014 – around half a year before the constitutional amendment will take place.

“I am well aware this course of action is problematic from a constitutional point of view, as the government is temporarily over-ruling parliament,” justice minister Simonetta Sommaruga said. “But the majority of the people have voted this way.”

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