Emma Cusworth asks the question; how have Swiss pension funds fared during the recent turbulence?
Emma Cusworth: Is there reason for concern?
Hanspeter Konrad: The system remains stable and can survive the crisis. Although it has been hit, it is much better protected than in 2000-2003 as risk models and recapitalisation procedures are in place to deal with underfunding levels. Although coverage levels have fallen and there is still some work to be done in terms of risk modelling, schemes are not facing a liquidity crisis and are able to meet their liabilities.
While some problems do exist in the Swiss pension fund landscape, there is no reason for schemes to panic and further legislation is not necessary.
Emma Cusworth: Many experts have actually called for the government to be more lenient given the current environment. Does ASIP share this view?
Hanspeter Konrad: Yes. We are in fact proposing a new version of the occupational pension regulation, the BVG, which includes fewer rules than are currently in place. Our proposal also follows a different philosophy, which puts the responsibility of the pension funds entirely on the board of trustees and adheres to the Prudent Man principle.
We also believe the minimum interest rate currently required by law should be eliminated and schemes should be allowed to set their own conversion rates for pension payments.
We definitely don’t want solvency tests, similar to those for insurance companies, to be imposed on pension funds. However, all trustees need to ensure they are fully aware of all the operational and investment risks involved in their scheme and manage them appropriately.
Emma Cusworth: The new investment guidelines introduced in the BVV2 regulations, effective from January 2009, also follow the Prudent Man principle. What are your thoughts on the new guidelines?
Hanspeter Konrad: They are generally positive and underline the responsibility of the trustees rather than prescribing a checklist or setting strict limits. This is a fundamental change in mindset by the regulators. Trustees now have to define a strategy and decide how to invest scheme assets. They can, for example, invest more than the suggested 30% in property, but are required to justify their reasons for doing so.
Emma Cusworth: Why do you think the BVV2 reduced the property allocation guideline from 50% to 30%?
Hanspeter Konrad: This point has attracted a lot of criticism as many industry players do not understand why it was reduced. Most funds have less than 20% allocated to property, but those with more have criticised the move as they now have to justify their allocation to this asset class. Property has proven to be a good investment during the recent crisis and has outperformed equities and bonds.
Another area for criticism relates to alternatives, which have been included in the guidelines for the first time. Just as a 15% allocation was introduced, the market turned negative and there is a danger that schemes might take these guidelines on board blindly. A while ago, some experts were telling schemes to lower their property allocation, for example, and invest in alternatives, which turned out to be toxic. Schemes must carry out careful analysis of the risk/return characteristics of alternatives, like hedge funds, commodities and private equity, to see if they are appropriate for the individual fund given its unique characteristics.
While it is a positive development to allow schemes to invest up to 15% in alternatives before they have to justify their allocation, the Prudent Man rule still applies and schemes need to be sure they are suitable.
Emma Cusworth: How do you see the events of last year affecting pension funds’ allocations to alternatives?
Hanspeter Konrad: There will be a much more conservative approach going forward. Schemes should have the option of investing in alternatives, but trustees have to analyse, and be fully aware of, the risks as well as the potential returns.
We may also see a move out of alternatives as they have proven to be risky and have not provided the downside protection that many were expecting.
We are encouraging our members to review their asset allocation generally in conjunction with potential recapitalisation measures once they have a better picture of their situation. We are urging them not to make any unnecessary changes out of panic, however. They have to do a full analysis and also consider their counterparty risk.
They should, for example, have another look at whether to continue with securities lending. We are not suggesting they necessarily discontinue, but they should consider again whether the risk/return characteristics are worthwhile.
Emma Cusworth: Have many schemes stopped lending securities?
Hanspeter Konrad: Most pension funds have stopped or are in discussions with their counterparties concerning what guarantees and collateral are in place. While it is a potential revenue stream if everything is in order, the counterparty risk is more important than ever.
Emma Cusworth: Will schemes have to ask active members to pay higher contributions?
Hanspeter Konrad: If the markets and sponsor companies continue to struggle that will have a further impact on funding levels and a likely result would be members having to increase contributions.
It is important though that the authorities give schemes the flexibility that comes with being long-term institutions. They should allow funds to take longer to recapitalise themselves, for example, which would potentially decrease the burden on workers.
There is an interesting dichotomy for Swiss schemes too as the government is currently not planning to recapitalise the Invalidenversicherung (IV) disability scheme by restructuring the value-added tax. The IV has a large deficit, which is taking money out of the national pension fund, the AHV. At the same time, workers might have to pay more for pensions.
Emma Cusworth: ASIP has introduced a new Charta for governance best practice. How does it differ from the existing code, the Verhaltenscodex?
Hanspeter Konrad: For about three years now there has been a discussion in Switzerland about best practice in governance focusing on trustee loyalty and integrity. The government’s intention is to introduce a legal code into the BVG regulations. This is not a good idea. Not many pension schemes have signed up to the Verhaltenscodex yet. It would be better to focus on a plan that is more workable.
We have established a code of ethical fiduciary practice, the Charta, which is very simple for schemes to comply with. There are three core principles: Firstly, those responsible for managing pension funds must put the beneficiaries’ interests first; secondly, they should not receive any material benefits to the detriment of the fund, such as kick-backs from advisers or investment products; thirdly, any conflicts of interest that affect their independence in making decisions for the scheme must be declared.
This last point is not covered in the Verhaltenscodex, but is one of the most important principles in good governance. It is also one of the most difficult things to manage because schemes have to establish a culture of openness and define a process for dealing with conflicts.
The need for openness should, however, be self-evident, particularly in the banking sector, but each individual fund should be allowed to find their own way of dealing with conflicts rather than having prescriptive rules enforced on them by regulation.
Emma Cusworth: How have your members responded to the Charta?
Hanspeter Konrad: It is obligatory for our 1,050 members to comply with the Charta from January this year and they are generally happy with the principles.
Compliance also shouldn’t be too onerous. Schemes will have to define some policies, such as for dealing with conflicts of interest, but ASIP has provided support materials, including template forms that schemes can use or adapt for declaring any gifts that they have received, for example.
Educating members is crucial. We hosted a series of special seminars in November last year and the Charta is a topic in our regular seminars. We are continually explaining the philosophy behind the code and the importance of fiduciary responsibility.
Pension funds’ advisers and consultants also have to comply with the Charta and have been very supportive of this.
We are currently discussing whether it could be adopted for all pension funds as a form of self-regulation. It would be a way to show the industry can manage itself without needing more regulation.
The Council of States, representing the individual cantons in the Parliament, recognises the value of the Charta as a potential solution regarding questions of trustee loyalty and the National Council, the second parliamentary house, is due to discuss it later this year.
Emma Cusworth: Overall then, what advice would you give to Swiss pension funds as we head into another uncertain year?
Hanspeter Konrad: There is no need for panic, but schemes also cannot hide from recent developments. It is important that the government creates a positive climate, considering the long-term perspective of pension funds. This means schemes can afford to live with some degree of short-term underfunding, but it obviously depends on the situation at each individual fund, which needs to be carefully reviewed.
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