Switzerland: Industry views
As part of the structural reform of the second pillar, Swiss regulations BVV1 regarding the supervision of occupational pensions and BVV2 concerning occupational pensions, disability and bereavement provision - have been amended. A new regulation, ASV, is also set to take effect from January 2012. As part of the legislative process by consultation, the social ministry BSV invited comments from market participants between November 2010 and February 2011. The regulations are now under review and their revised version may be published as early as June. The following are extracts from reactions by various market participants in the Swiss pensions industry
ASIP, the Swiss pension fund association
As a structural framework is necessary for the development of occupational pensions, we welcome the fact that the bill is based on these fundamentals and defines the duties, competencies and responsibilities of the different entities, particularly at the board of trustees level.
However, in ASIP's opinion it is about supporting and promoting the individual initiative of pension fund managements. They should have plenty of room to manoeuvre whilst also carrying responsibility.
The question is how to implement the principles of practical, efficient and integrated pension fund governance and take into account members' interests. For that reason, ASIP has issued a charter and guidelines. Their implementation should safeguard the regulations of the BVG law. In fact, the ASIP Charta has been a binding code of conduct for all members since 1 January 2009.
We believe this charter over-detailed, unpractical regulations redundant and therefore suggest the adoption of it as an alternative.
Leadership cannot be replaced by regulation. The current interplay of the board of trustees, management, consulting actuaries, auditors and supervision should serve as a mantra.
The proposed regulation seeks to increase the transparency and consequently the trust of the insured members in the second pillar. However, this argument is not convincing. Despite the negative incidents over the past few years - such as transgressions in competencies due to unclear or absent organisational structures and even corruption - the occupational pension fund pillar in Switzerland has always functioned properly, with the majority of players behaving impeccably.
ASIP proposes a review of the provisions, particularly, the functions of the auditors, the rules regarding the distribution of funds at times of insufficient reserves, the costs of asset management, the requirements imposed on the management and asset management, legal transactions with relatives and friends, disclosure and the taking effect of the new provisions under BVV2 as well as the costs of the supervision under BVV1.
The CHF16.9bn (€13.2bn) Migros pension fund thinks that in a liberal democracy, new administrative provisions should be avoided if they have not been carefully considered. However, the pension fund explicitly supports the direction of the structural reform and its statutory provision.
Nevertheless, we believe that many of the suggested proposals restrict the room for manoeuvre of boards of trustees, and because of the unnecessary, sharp rise in resources spent on oversight and governance, costs are expected to increase. We would also like to add that various provisions are not within the law because of the lack of delegation of the authority from the legislator to the Swiss Federal Council.
In their current form the provisions send the wrong signal, which is why we propose their rigorous revision.
For our pension fund the most problematic clauses under BVV1 are the costs of the new umbrella supervisory body, the Oberaufsicht, for pension funds and investment foundations. With regard to BVV2, we object to the unclear rules regarding the distribution of funds at times of insufficient reserves, the costs of asset management, the requirements imposed on the management and asset management, legal transactions with relatives, disclosure and the taking effect of the new provisions.
The new regulation ASV is problematic in terms of the delegation of duties, the type of custodian, the pre-audit, the usage of the original assets and the restrictive rules for asset allocation.
The second pillar is functioning well and has until today managed to adapt to arising challenges. This has largely been possible due to the sphere of influence of the social partners. They have been able to use this room to manoeuvre for the benefit of the insured. The increasing administration of the second pillar jeopardises this effective type of management.
Pension Fund Services AG
Many of the new proposals are not part of the structural reform and have no legal basis in the BVG law. Due to the new supervisor and the more extensive duties of the auditors they will result in higher costs for pension funds and interfere in the competencies of the highest responsible entities.
In terms of the stricter regulations for the pension funds, the proposals overshoot the mark. They remove the competencies and responsibilities from the shared employer and employee representative board and transfer the leadership role to auditors and the experts of the occupational pensions sector.
These changes will place high demands on the new organisation and particular its assets, which is why there needs to be a sufficiently long period of transition.
For us, four regulations of BVV2 - concerning the rise in benefits at times of low reserves, administration costs, requirements of the board and asset management and disclosure - are foremost.
We suggest that higher benefits, particularly when above the minimum interest rate, should only be permitted when article 48e allows for it, when the funding ratio calculated in line with article 44 paragraph 1 is at least at 100% and when at least 50% of the accrued yield is added onto the reserves until the target value is reached.
We also recommend the deletion of article 48a, which states that assets whose administration costs are not accurately accounted for need to be specially marked in the annual financial statement.
It is important to note that while pension funds are required to diversify sufficiently according to BVV2 article 50, article 48f of the proposed regulations limits the competition between domestic and foreign asset managers and particularly restricts the latter.
We suggest allowing foreign asset managers to carry out their activities when they are subject to a financial market authority similar to that of the Swiss FINMA. We also propose that institutions responsible for administration or asset management of occupational pension funds state in writing whether and what kind of personal pecuniary advantages they have gained and that they have handed them over.
Publica - Pensionskasse des Bundes
The commission of Swiss federal pension fund Publica welcomes the pursuit of more transparency in order to strengthen the trust in the Swiss second pillar. The trustee-based administration of occupational pension fund assets justifies clear rules, however, we believe that the proposals are likely to harm than help.
Undoubtedly, it is important to prevent malpractice in occupational pensions. But over-detailed regulation cannot prevent this because it cannot foresee all cases. Furthermore, leadership cannot be replaced with regulation. Instead of numerous rules, the current code of conduct could have been clarified, for example, through the ASIP-Charta or guidelines.
The regulator appears to overlook that the biggest risk to pension funds is not malpractice but sustainable funding, which the proposals do not address at all.
The majority of the 2,351 pension funds in Switzerland behave impeccably, fulfil their duties and are able to distinguish between their own interests and those of the beneficiaries. Yet the proposed regulations seem to encourage collective punishment.
Apart from the lack of legal foothold, the proposals undermine the principles of the second pillar - the social partners and their representation in management - in favour of the highest supervision (Oberaufsicht), the auditors and to a certain extent, occupational pension experts.
In 2007, the Federal Council stated that the BVG law already restricted pension fund managements' room for manoeuvre. Despite this, the regulator deemed to further narrow this scope. Many companies are unlikely to continue their, particularly autonomous, pension plans amid increasingly complex regulations or will have to cut benefits due to the increasing costs associated with the structural reform.
The aim of the reform is to increase transparency and efficiency among pension funds and asset managers. It should not, however, undermine the social partnership, disempower the current leadership, increase costs and regulations.
With the current proposals, the regulator is seemingly guided by the structure of the law-based first pillar rather than the second pillar.
The proposed regulatory changes are neither, in the interest of the insured nor, in the interest of the pension funds because their external costs and administrative expenditure will sharply increase. On top of that the freedom of decision-making of the foundation council, the Stiftungsrat, will be severely curtailed.
The only people we expect to benefit from the proposed changes are the auditors. They are likely to increase their fees with the additional expenditures, as well as the vastly overpaid employees of the Oberaufsicht.
We cannot imagine that the BVG commission has contributed to these proposals. It is likely that the federal office technocrats ignored the recommendations of the BVG commission and acted on their own accord.
We particularly object to the overstaffing of the proposed supervisor and the rising costs under the revised BVV1.
The proposals for BVV2 severely intervene in the decision-making powers of the Stiftungsrat. Setting the minimum interest rate is one of the core duties of the Stiftungsrat. Choosing random percentage figures from when an additional return is granted as suggested in the proposals is a poor idea. According to those, at a funding level of 108% or above, only the BVG interest rate is allowed to be passed on - however they neglect to mention a ban on the increase in pensions. As a result, the retirees are at an advantage to the expense of the actively insured.
The screening of the integrity and loyalty of individual foundation councils or the CEOs is to be rejected. It is also questionable how the supervisor can check changes in asset management without the appropriate specialist staff.
Overall, we recommend postponing the introduction of the whole package by a year in the interest of the insured and the entire second pillar and to revise it again with relevant experts.
We consider many of the proposed regulations as a questionable intervention in the autonomy of Swiss pension funds and call for a revision of the proposals issued in November 2010.
In general, we welcome increased second pillar transparency and governance. But the proposals need improvement. We have noted the high level of prescriptive detail in certain areas, the implementation of which might lead to substantial difficulties in practice. In addition, some of the provisions do not have sufficient basis in Swiss law.
We focus on two of the BVV2 provisions. Proposed article 46 covers increases in benefits - particularly granting a higher interest rate to employees than the minimum interest rate set by the BVG law - at times when reserve levels are low. This violates the legally entrenched autonomy of occupational pension funds and does not allow for the particular situation of each fund. The proposed regulation is not suitable for pension funds with a defined benefit plan. At best, the proposals may be suitable as a guideline.
New article 40 concerns the independence of the appointed pensions expert (actuary). The proposal closely follows the existing provisions governing the choice of independent auditors, which have been taken from the Swiss code of obligations. This is not differentiated enough given that auditors and experts fulfil very different roles.
Towers Watson is of the opinion that the necessary steps for more transparency and governance were already introduced with the first BVG revision in 2004. It is therefore questionable whether additional regulation will indeed have any positive impact while administration costs increase as a result.
Furthermore, it is important to bear in mind that current regulations already present a significant burden to, particularly smaller, pension funds. Over-regulation could strengthen the ongoing consolidation process further and eventually lead to the existence of only a few, broadly uniform pension funds, which few employers can identify with and are willing to support.