Swiss pension fund governing body, the Arbeitsgemeinschaft Berufliche Vorsorge (ABV) has drawn up a checklist outlining what Swiss pension funds should do in the case of any underfunding, in a bid to ease the rising numbers of Swiss pension scheme shortfalls.
At the end of 2002, it was estimated that 30–50% of all Swiss pension funds were experiencing significant financial shortfalls. In 2001, only 6% of plans were considered under-funded.
According to the ABV paper, which will be published shortly, a pension fund is considered underfunded when the total amount of assets less liabilities is lower then the insured sum of all returns. Swiss pension funds must be able to pay these insured returns at any time.
Regardless of the extent of under-funding, schemes must report their financial position to the Swiss government supervisory body no later then six months after the end of the business year.
The fund has also to report what measures are being taken or will be taken to improve the situation.
ABV has identified three degrees of under-funding and the necessary measures to be taken in each case:
q If only the reserves for fluctuations of securities are inadequate, but all liabilities are still covered by the assets, then a pension fund is not obliged to change its investment strategy (such as, to reduce equity exposure). However such a scheme must end all voluntary benefits. Furthermore, contributions must be increased to the extent that insured achievements are no longer debited to free reserves.
q If the cover ratio for the fund is moderately below legal requirements, 90–100%, actuaries will check the scheme thoroughly. If any individual accounts are above the legal minimum, then the interest on paid-in capital must be reduced, if necessary, to 0%.
q If a scheme is below 90% and therefore ‘considerably’ underfunded, employers as well as employees should increase contributions. The exchange rate (Umwandlungssatz) for accumulated capital into returns and compensation for inflation should be lowered and existing technical reserves (for example, for longevity) should be abolished. Interestingly, even in the case of ‘considerable’ underfunding, ABV does not proscribe a reallocation of investments.
As ABV points out, pension entitlements should only be reduced in extremely severe situations. Such entitlements are considered as legally enforceable contractual issues in Switzerland.
The ABV statement comes at a moment when the Swiss media has raised concerns about pension reductions.
According to ABV, such a step would endanger trust in pension schemes and would cause severe damage to the entire old age system.
ABV is an informal group of nine organisations involved in governing Swiss pension schemes.