Switzerland: Shifting attitudes
The regulators are under pressure to allow cuts in benefit levels as funding problems increase, reports Emma Cusworth
Tensions between Pensionskassen and the Swiss cantonal regulators are rising as increasing numbers of schemes sink into deficit. As liabilities mount and the supervisory system comes under strain, pressure is growing for the government to cut mandatory benefit and interest rate levels while taking a lenient approach to regulatory changes and current funding problems.
As funding levels have fallen, Pensionskassen are being pushed to take action as a matter of urgency. In principle, even those with small shortfalls must take measures to return to full funding. According to the Bundesgesetz über Berufliche Vorsorge (BVG) regulations, underfunding is only allowed in the private sector if scheme management has taken steps to regain full funding within a maximum of 10 years. For those with 90% coverage or below, recapitalisation measures are inevitable.
In a statement, the Swiss Federal Social Insurance Office (FSIO) warned: "Given current uncertainty, it would be inappropriate to rely on financial market improvement as the situation may not repair or may even worsen. The deeper deficits become, the more schemes will struggle to close funding gaps based on current investments. Delaying recapitalisation measures will, therefore, be more painful."
Industry experts are, however, urging leniency despite the FSIO's call for immediate action. Graziano Lusenti of consulting firm Lusenti Partners is among those calling for a more practical, balanced approach to funding shortfalls.
There are already signs of a shift in regulatory attitude, revealed in the revised BVV2 investment guidelines introduced from January 2009. BVV2 included alternative asset classes for the first time, but also stressed the responsibility of Pensionskassen board members in strategic decision-making.
"This shows a fundamental shift in the regulator's approach," says Hanspeter Konrad, director of the 1,500-member pension fund association, ASIP. While BVV2 still includes guidelines on maximum investment levels for individual asset classes, board members can decide to invest more, but must justify and explain that decision.
Despite allowing greater flexibility, BVV2 has attracted criticism for including a 15% allocation to alternatives for the first time. According to Sven Ebeling, Mercer's head of investment consulting in Switzerland: "The revised regulations came into effect at an unfortunate time. Allowing alternative assets just as hedge funds, private equity and commodities were performing particularly badly has caused irritation."
Whether Pensionskassen will use the looser guidelines is yet to be seen. "As soon as financial markets recover, they will be glad they were given a more liberal regime," Ebeling says. "The regulations do the right thing by fostering a higher degree of diversification to protect portfolios against market volatility.
"However, disasters such as 2008 will always be difficult to cope with, irrespective of how tight or loose regulations are," he warns.
Ebeling sees little need for regulatory review following the current crisis. "Swiss pension regulation did not prevent or hinder any fund taking actions that would have protected them against capital losses in 2008," he says. "The losses were not the fault of the regulation."
However, others argue overly-prescriptive rules have affected schemes' decision making and funding positions.
Professor Heinz Zimmermann of the University of Basel believes the requirement for schemes to maintain almost constant full funding led to hasty investment decisions, such as ill-timed equity sales. Furthermore, he believes promises made to pensioners will endanger the pension system's future security.
The government has already taken steps to reduce benefit levels to alleviate liability concerns. The conversion rate, currently 7.05% for men and 7% for women, will fall to a flat 6.8% by 2014.
However, the FSIO is pushing for another cut to 6.4% by 2015 saying current levels pressurise schemes to take greater risks to achieve above-average returns. For those already in deficit, this is particularly prevalent, given their greater reliance on returns to meet liabilities.
The Federal Assembly is also backing the second cut, but a petition earlier this year succeeded in forcing a national referendum, threatening its likely implementation. The outcome of the referendum will be heavily influenced by generational issues and will depend on whether those closer to or further from retirement turn out in greater force to vote.
Active employees are already disadvantaged by the minimum guaranteed interest rate on savings capital of current pensioners, currently 2%. "This is a heavy burden for employers and active employees, most of whom won't get any interest on their savings capital in coming years," Ebeling says. "Thus, active employees are heavily subsidising pensioners now and for the foreseeable future, which is not what people had in mind when they agreed to the generation contract that is the foundation of our social security system."
The minimum level may be reduced next year, but experts fear political influence could cloud the decision. Meanwhile a commission is studying whether a clearer, transparent way of defining the rate can be established.
A broader review of the BVG regulations is also under way as past and current crises place more strain on pension supervision. Opinions remain sharply divided on the appropriate shape of future regulation, however.
According to Konrad: "While pension regulation does need some review given recent developments, it is not necessary to introduce any big, new changes to the system."
In advance of announcing any revisions, the government has tendered a six-month research project, which was expected to commence on 31 August.
The project includes two phases: firstly, to examine the differences and similarities with foreign pension supervisory systems; secondly, to suggest potential reforms. The arguments for and against solvency testing occupational pensions will get particular attention.
According to Ebeling: "It is certainly worth thinking about ways to better protect and maintain the solvency of pension funds, but applying [something like] Solvency II would not make sense.
"Up till now, the Swiss pension system was often considered a model for other countries. However, the investment guidelines still contain elements that are difficult to justify in pure economic terms. We are probably heading towards a pure prudent man regulatory approach," he concludes. "But that will be some time away. Having just seen changes in January, not much is likely to happen in the next three years."