SWITZERLAND – The Nationalrat, or lower house of the Swiss parliament, has rejected a draft law permitting Publica, the CHF32.8bn (€21.1bn) pension fund for federal employees, to switch from defined benefit to defined contribution from 2008.

The proposal will now go to Switzerland’s Ständerat, or upper house. If the Ständerat approves the measure, the Nationalrat will have to reconsider it. If however the Ständerat rejects the law, the reform of Publica will have failed.

In the vote late last week, Social Democratic MPs joined with those from the right-wing SVP to defeat the law, which was approved by the Swiss government last autumn.

Hildegard Fässler, a Social Democratic MP, said her party could not support the plan as the benefit cuts for federal employees were too “dramatic”.

Under the law, Publica was to have ceased providing a corporate pension to its 40,000 active members on a previous salary basis. Instead it would have paid out according to how had been paid into the scheme.

The law would also have enabled Publica to remove CHF17bn of its total assets and put them in a separate fund to finance pension payments for retired civil servants.

Publica had argued that the payments, which include those for employees of former state-owned telecoms operator Swisscom, were too great a burden on its finances.

Yves Christen, an MP from the liberal Free Democratic Party, which supported the draft law, urged his colleagues to reconsider their opposition. “The state loses CHF1m for each day that the reform of Publica is postponed,” he said.

Last month, Publica said it had finished 2005 with surplus earnings of CHF1.76bn. However, instead of distributing the earnings to members, it plans to set them aside as reserves.

Although the fund was overfunded at the end of 2005, it said its coverage ratio - or the extent to which it can finance liabilities - had to reach 115% before it would distribute surplus earnings to its insured.