Switzerland: Yes, but...
Swiss occupational pension reform is on schedule but the industry does not agree on how to implement it, reports Barbara Ottawa
‘We welcome the reform, but….' that is how most of statements on the structural pension reform in Switzerland start. And some of the ‘buts' are big ones: Allegations like overregulation, cost explosion and unlawful decrees can be found frequently.
In March last year, the Swiss Parliament passed a law on structural reform, including the creation of a new top supervisory body, the regionalisation of the other managerial structures as well as new governance regulations for Pensionskassen.
The latter comprise an obligation for board members and heads of asset management at Pensionskassen "to have a good reputation, proof proper conduct of business operations and for there to be no conflicts of interest". Further, any business done between the Pensionskasse and a company close to a board member, or other high-ranking official at the fund, has to be laid open in the year-end report to the auditor. Lastly, Pensionskassen have to publish the names of all asset managers, external experts and consultants in their annual report.
So far so good. The law is passed and will not be changed but what needs to be done now is the issuing of decrees to implement the law - and here is where most market participants agree that the government is going too far.
Take, for example, the association of Swiss Pensionskassen, ASIP, which represents almost half of the 2,000 plus regulated pension funds in Switzerland. In a statement (see article in this section) signed by the association's president Christoph Ryter and its director Hanspeter Konrad, the law is welcomed as it outlines the remits of various participants in the administration of the second pillar more clearly.
"At the same time, Parliament has contributed to building confidence and credibility in occupational pensions with a few regulations regarding governance and loyalty in asset management," ASIP points out.
However, the association criticises the unnecessary issuing of "too detailed, non-practical" and "not well thought through" decrees instead of using the ‘ASIP-Charta' as a model. This code of conduct has been accepted and implemented by all ASIP members.
Similarly, the Chamber of Pension Fund Experts welcomes the structural reform in principle but notes that enough decrees have already been issued regarding pension fund governance - they should "just be applied consistently".
The Vorsorgeforum, a collective working group of various pension-related associations, is critical of the fact that no expert organisation has been asked to help with the drafting of the decrees, although help was offered.
Ronald Schnurrenberger, chairman of the board at the Pensionskasse PKE, says: "The planned regulations are evidence of a very alien concept of necessity and feasibility."
For Ryter and Konrad, many of the decrees now suggested by the government are merely "sops presented as panacea against malpractice" and they add that "leadership cannot be replaced by regulation".
One specific point criticised by ASIP is that pension funds would be required to report more to their auditors, which are then responsible to confirm the legality of contracts, deals and staff appointments.
The Swiss chamber of auditors, the Treuhand-Kammer, itself sees ‘too much weight' put on auditors' opinions. It also fears that regulations like the obligation to present a competitive offer to every deal signed with a company close to a board member will degenerate into "box-ticking exercises".
The association of autonomous collective Pensionskassen (IGaSG) also sees the suggested decrees as "severe curtailment" of the freedom of pension fund managers.
The catalogue of decrees is proof for the government's "unrealistic need to regulate and control everything", the association points out.
This is an often mentioned criticism as the board of pension administration experts also told the government that it "cannot control everything", the Swiss association of actuaries points out the decrees "try to regulated what cannot be regulated in practice" and Towers Watson Switzerland sees the decrees as "intervention by the state" in the second pillar.
Apart from the loss of independence second pillar representatives fear a cost explosion resulting from overregulation.
At the Migros Pensionskasse (MPK) - where Ryter is managing director - Jörg Zulauf, head of finances, calculated that the implementation of the structural reform in its current form would lead to a 20-fold increase in fund costs.
Another source for higher costs is the new higher supervisory body, the Oberaufsichtskommission which will have the right to revise and issue directives to supervisory authorities, pension experts and auditors.
The five to seven member board is set to have a sizeable secretary and administrative staff bringing the total to 28.8 full-time jobs costing CHF7.16m (€5.6m) per year, the council of cantonal governments calculated. In its statement it points out that the new higher supervisor had been expected to cost only half this amount.
Additionally, cantonal governments fear that a large and powerful top supervisor will mean a centralisation of supervision. A fear in the original debate on the new legal framework on supervision.
The council also added the new body will issue new regulations causing follow-up costs for Pensionskassen "merely to justify its existence".
Another problem with the Oberaufsichtskommission could be appointing board members. According to the suggested decrees these should be independent specialists working part-time for the new higher supervisor. "This practically excludes all experts working in the field", the insurers association SVV points out.
According to second pillar experts the planned implementation of the structural reform will make it hard to find people willing to work in Pensionskassen at all, especially as lay trustees.
The association of multi-employer funds, IGaSG, complains that the new regulations assume that every board member had criminal intentions and compel pension fund managers to prove their innocence - which effectively is a "reversal of the burden of proof".
"It seems that the government does not trust the trustees and pension fund managers to fulfil their tasks independently and dutifully," the chamber of pension fund experts notes.
The aims of the structural reform are to strengthen and professionalise transparency, governance and supervision in the second pillar in which around CHF600bn in assets are managed. The government has justified these measures by citing previous and current scandals involving alleged corruption, fraud and misconduct in occupational pension schemes.
However, in the wake of the BVK scandal Ryter told IPE that the fund had always been a model when it came to control mechanisms. "That is all you can realistically do to prevent these things from happening," the ASIP president pointed out. He added that should the allegations prove true, it would show that no system is 100% fail-safe - or that stricter controlling mechanisms had begun to take effect.
The Vorsorgeforum stresses that these are "isolated cases" and that overall the Pensionskassen have functioned well.
Christoph Curtius, member of the board at PKRück, a re-insurance company for Pensionskassen, goes as far as to say: "The increased amount of powers that will be given to members of regulatory bodies and auditors under the new regulations will make them as vulnerable as the people carrying responsibilities within the Pensionskassen".
According to Migros Pensionskasse, decrees allowing auditors to look into the private financial affairs of individual Pensionskassen board members and managers (even without any suspicion of misconduct) go beyond the scope given by the passed structural reform legislation.
Similar allegations of "unlawful" decrees which "lack basis in the corresponding law" - as the chamber of pension fund experts puts it - can be found in several statements as some of them are based on standard letters either issued by ASIP or a large pension provider, the Swiss social ministry confirmed.
"Too much regulation will lead to a consolidation towards only a few almost uniform Pensionskassen surviving without participation of the social partners as especially employers will pull out," Towers Watson states, adding that this would be "a shame as the multitude and variety of solutions and providers is part of the second pillar".
The board of pension administration experts pointed out that the decrees accounted "too little for differences in pension funds" which will mean that many smaller Pensionskassen will "lose interest" in providing independent services.
Some critics fear that the structural reform could be the end of the current Swiss system of occupational retirement provision: "Not only is the regulator overshooting the mark with the decrees it is also probably killing the second pillar - which some politicians would welcome," says Herbert Brändli, managing director of the multi-employer scheme Profond.
He also criticises that the regional supervisory bodies will no longer be state authorities, but independent bodies liable with their own assets.
Barbara Brosi, heading the structural reform project at the social ministry, confirms that market participants have made "ample use" of the possibility to have a say in the implementation of the reform.
However, she stresses that "the necessity of the reform" as well as the principle aims have not been challenged.
The ministry is currently reviewing all the calls for a "drastic revision" of the decrees or a "real structural reform", which the interest group Innovation 2. Säule demands, to come up with new suggestions before the summer.
One of the few statements that can already be filed as "dealt with" is that by the consumer protection association which states that it "welcomes the tighter regulations".