New investment rules are being implemented, the supervisory structure is up for reform and the financial crisis prompted an investigation into admin costs, writes Barbara Ottawa

The mandatory second pillar in Switzerland received a severe blow in a binding referendum in March 2010 when over 70% of voters rejected a proposal to decrease the conversion rate of the second pillar to 6.4% by 2016, on top of an already fixed cut to 6.8% by 2014.

The consensus is that this will lead to a widening of the pay-as-you-go element and to higher contribution levels, especially in smaller pension funds. Critics see a cut in the conversion rate, which is used to calculate pension pay-outs, as ‘pension theft', and call on pension funds to reduce administrative costs. Indeed administration costs are a major issue, although the funds themselves partly blame existing legislation.

To help assess the main cost factors in the system, the Swiss social ministry (BSV/OFAS) has commissioned a study into second pillar administration costs to be concluded by spring next year. Scheduled for publication in 2011, this comprehensive report will also cover the level of benefits, the conversion rate, administration costs and other issues. It might include another hot topic in the current post-crisis second pillar debate: recovery measures for Pensionskassen.

Some pension funds would like to be given the opportunity pre-emptively to lower the interest paid on assets in a year, maybe even to 0%, when the fund has had a negative year. At the moment such steps are only possible once a Pensionskasse becomes underfunded.

Further, calls to include pensioners in recovery measures are growing louder. According to the Swiss second pillar law of 1985 (BVG/LPP), pensioners' benefits in a Pensionskasse are vested and cannot be altered. However, with the Swiss demographic outlook mirroring that of other industrialised states, pressure on active members to help re-fund a Pensionskasse is increasing.

Another issue under discussion is the funding level of public pension funds: this is set to result in a new law this autumn. So far, public pension funds have been allowed to stay well underfunded (in some cases assets only covered 50% of liabilities) as they often had a state guarantee and it was argued that civil servants' salaries were a much more stable source of contributions than those of private employees.

But there are problems with these assumptions. Firstly, recent years have seen many cantons outsourcing some of their work, resulting in the number of civil servants in public pension funds effectively decreasing. Also, when a larger company leaves a public pension fund, its pension provisions come under regulations for private funds, which require them to be fully funded: this often means that they have to introduce recovery measures straightaway because of their history of heavy underfunding. Further, many cantons have withdrawn their promises to guarantee financial support to their Pensionskassen: instead they have started to increase their funding levels, often with the help of one-off payments by the cantonal authorities.

As of end-2009 the average funding level of public pension funds stood at 90%, according to calculations by asset manager Swisscanto, with all funds above the 70% mark. The pension gap in public funds was estimated at CHF31bn (€22.8bn) without reserves and at CHF100bn with buffers.

Last year, the federal government proposed that all public pension funds should move to full funding within 30 years - a proposal that was met by severe criticism. Eventually a compromise was put forward, according to which all public funds will have to reach at least an 80% funding level by 2050. Those that do not reach the first hurdle of 60% by 2020 and 75% by 2030 will have to pay interest on the shortfall.

Meanwhile, Pensionskassen still have a few months in which to implement the new investment regulations, which came into effect on 1 January 2009 with a two-year transition period. Under these BVV2/OPP2 regulations, hedge funds and private equity have been explicitly included in the catalogue of permitted investments, although the share of alternatives in a portfolio was capped at 15%. Exposure to real estate was capped at 30% (previously 55%) - however, in turn, the proportion of foreign investments in this asset class was increased from 5% to one-third. According to Swisscanto the lower real estate limit required some 42% of pension funds to reduce their allocations.

One of the most complex reforms the second pillar has seen in decades will be the restructuring of the supervisory authorities. Over the next two years, the current cantonal supervisory authorities will be regionalised and an umbrella supervisory board, the Oberaufsichtskommission, will be created to replace the social ministry as top supervisor.

The new authority will have powers to pass nationwide standards which might include actuarial assumptions or the level of buffers in a Pensionskasse. Another change that might affect the second pillar in future is the currently debated eleventh revision of the first pillar system AHV/AVS, which might include the introduction of a flexible retirement age.