The Swiss Federal Council has proposed changes to the investment regulations governing pension schemes that could allow sponsors to establish pure defined contribution (DC) funds.

The changes, proposed as part of a new law on vesting in pension funds, would provide investment choice to plan members. The proposals transfer, under certain conditions, the burden of investment risk in non-mandatory occupational pension schemes to plan members by waiving certain legal guarantees.

At present, non-mandatory pension schemes may, under certain conditions, allow members earning above CHF 126,900 per year to choose from a selection of investment strategies.

However, under the current rules (FZG/LFLP), members are assured of a minimum return, even if they opt for a risky strategy that delivers poor returns. The draft revision of the FZG/LFLP revokes these safeguards, provided certain conditions are met. This means all members would receive the actual value of their retirement savings capital when leaving the fund.

Under the draft, there would still be a requirement for the pension fund to provide at least one low-risk strategy among the investment options offered to members, although the precise definition of a “low-risk strategy” has so far not been provided by the Federal Council. In addition, members must be provided with information about the costs and risks of each investment strategy.

At present, under international financial reporting standards (IFRS), Swiss pension plans are considered to be defined benefit (DB) plans because of the in-built guarantees.

Olivier Vaccaro, partner, Aon Hewitt Switzerland, said: “As long as the parliamentary bill is not modified, the changes would allow sponsors to introduce pension schemes that might qualify as defined contribution (DC) under IAS19, and thus to move some pension liabilities off their balance sheets.

“So this would be worth considering for those companies reporting under these accounting standards and who wish to reduce risk on their balance sheet.” 

He concluded that the move would only affect around 5% of the Swiss working population.

“But it is likely in particular to affect accompanies in the financial sector because salaries are higher there, and such companies are sensitive about their balance sheet because they are subject to solvency requirements.”

The legislation is not considered contentious, but has yet to be approved by either parliamentary chambers. Any resulting law would be unlikely to take effect before 2017.

Read more about the shift towards investment choice in Switzerland in the recent issue of IPE