In a public referendum last March, Swiss voters rejected a proposal that would have lowered the mandatory retirement rate paid on workers' pensions. The proposal lost by a wide margin of 72.7%.
After voters rejected the measure, the Swiss Government lost no time in putting in motion reform measures to be phased in starting 2011, which are aimed at making occupational pension funds more transparent, more competitive and hopefully, more efficient. The government has also begun a study, to be completed by the end of 2011, to determine how the second pillar should develop.
“The structural reform will be the catalyst for the cultural transformation that the second pillar system needs,” said Martin Kaiser, who heads the Swiss government’s Old-Age and Survivors’ Insurance (AHV), the government’s mandatory social security pension plan. “Every scandal we have seen in the past years had its origins in Verfilzung (cronyism), lack of transparency and conflicts of interest,” he said, speaking at the Pension Fund Forum in Zurich on 30 November. (The Pension Fund Forum is organised by GP’s parent company, Incisive Media.)
A government white paper details the planned changes, including more fee disclosure, and requirements that in future, pension fund administrators can have no conflicts of interest. The new regime calls for stricter audits and a ban on “front-running, as well as parallel and after-running”. The latter refers to insiders using their knowledge for personal gain.
The government and those familiar with the system defend the ambitious plan as a necessary overhaul. “The entire structural reform is focused on providing a set of useful rules, not prohibitions,” Kaiser told the conference. The federal government under the new regime will take a less direct role to supervision. It is setting up an independent super-regulatory commission, or Oberaufsichtskommission, to oversee the system and ensure its stability, while national and international funds will be regulated at the state (cantonal), rather than federal level. The new rules are to be completely phased in by January 2012.
In the present environment, some managers argue that any new regulations will just make their job harder.
“When one looks at markets, the high volatility, the reduction in coverage and now low interest rates, it leads to the fact that many problems in years past that could be solved, today are harder to solve. We face difficult decisions,” said Vera Kupper Staub, chief investment officer of the City of Zurich pension fund. Swiss pension fund mangers already deal with aspects unrelated to their primary task, including mandates to encourage home ownership, which Swiss are allowed to finance out of pension savings, she said.
Regulations already threaten to smother funds in administrative tasks, while placing managers “in a position to be able only to follow orders, rather than to actively make decisions,” she told the Forum.
The contentious rate change voters rejected would have applied to the so-called minimum conversion rate used to set the annuities paid on workers’ retirement savings. The rate has been lowered since it was first introduced in 1985, from 7.2% to around 7% today, and will drop again in 2014 to a minimum of 6.8%. The referendum, had it passed, would have lowered the floor still further to 6.4% by 2016.
Some experts believe even the proposed minimum rate was still far too high, saying 5% would be more realistic for the country’s some 2,340 private occupational pension funds, which at the end of 2009 managed a total of CHF600bn ($638bn).
Nobody has seriously has suggested scrapping guaranteed rates all together. Besides the conversion rate, the 1985 Swiss Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans requires a minimum return rate applied to occupational pension assets. Today the rate is 2%, down from 4% when it was introduced, reflecting lower returns on stocks, and lower interest rates that have left yields on Swiss 10-year federal Eidgenossen bonds, a key component of many portfolios, hovering below 2%.
“The Swiss minimum savings rate is not a great instrument. It goes in the right direction but it could be better. As long as the standard of living is guaranteed, a product could be designed to provide that,” Johannes Binswanger, an economist at Tilburg University in the Netherlands, told the Forum. He believes that a product with a built-in guarantee tied to the standard of living would be simpler than fixing a minimum rate of return.
The pension industry admits that it shares some of the blame for the failure of the latest initiative to pass. “We have, to be correct, a problem of perception. We failed to make clear what would be achieved if this rate was lowered,” Hanspeter Konrad, head of the Swiss Pension Fund Association ASIP said at the event. He has vowed to continue to oppose what he terms “regulatory escalation,” saying the basic structure of Switzerland’s current three-pillar system has served the country well.
The Pensions and Lifetime Savings Association (PLSA) is in the process of convening an industry-wide group to take forward the work of the Institutional Disclosure Working Group (IDWG).
The Transfers and Re-registration Industry Group (TRIG) has given its support to an initiative which aims to complete occupational pension transfers within three weeks.
Scottish Widows has completed a bulk annuity deal for the Hitachi UK Limited Pension Scheme.