If it’s not broke...
Written by Christopher Andrews
Christopher Andrews explains why reactions to the Swiss government’s pension reform plans haven’t been as positive as originally hoped
Unfair, unlawful, burden-some and expensive; this was probably not the reaction the Swiss government was hoping to receive from its plans for structural reform of its occupational pensions system, but that’s the reaction it got. Its consultation on reforms of ‘second pillar’ legislation closed at the end of February, and while there was acceptance that some reform is indeed necessary, the overriding message was: if it’s not broken, why fix it?
For the government’s part, it is aiming to introduce a more efficient supervisory structure to oversee the second pillar, while improving governance within pension sche-mes. These are both laudable aims. But intention and result are often mismatched, and a structure of over-the-top micro-management appears to be the outcome of its plans. Second pillar players, including major pension schemes, advisors and the pension fund association ASIP, are not happy.
Most do seem to agree that changing the supervisory structure is necessary. Currently based on cantonal supervision, a new Federal supervisory authority is being introduced to oversee the entire system, bringing overall rule-making under that central body. This means that where rules now differ from canton to canton, there will be harmonisation, which should simplify things for those working across cantons.
The problem is that this new system is going to cost, and some have estimated that it is going to cost big.
Stephan Wyss, a pensions expert at Swisscanto, says that while all of the cantonal supervisory authorities employ around 90 people, the Federal authority alone will have something like 25. “So those who only have to regulate will have almost a third of the people of those who actually have to supervise the individual funds,” he says. “That means cost. These costs will be charged to the employees, and the Federal authority will release additional rules to “improve” the second pillar, so this over-regulation will cause more work for the industry, which then means even more administration costs.”
Exactly what those costs will be is difficult to say at this point, but based on the available data, Migros Pensionskasse, the pension scheme for supermarket giant Migros, has calculated a 20-fold increase in costs to the fund. In an open letter to Swiss interior minister Didier Burkhalter, it acknowledged that reform was necessary, but echoed the general sentiment that this was going too far.
Beyond increased cost though, there are a number of other comp-laints around the proposed reforms. To begin with, while they aim to improve governance, they are par-adoxically meddling with aspects of board accountability, particularly around setting interest rate credit for individual savings accounts. Acco-rding to Article 46 of the reforms, if the funded status of a scheme is not at least 110 per cent, and the fluctuation reserves don’t meet at least 75 per cent of their target, then the trustees can’t decide on any benefits improvement.
There are obvious problems with this. A one-size-fits-all approach doesn’t really make sense for schemes with very different member profiles, and again, it is meddling with board accountability under the auspices of improving governance. Wyss quips that “It’s as if you don’t need a pension fund board any more, you only need authorities.”
“Our position is that the board is in charge, and is accountable,” says Daniel Thomann, managing director of Aon Hewitt Switzerland and a board member of ASIP. “There’s nobody else. And if anything goes wrong you know where to go. But now, partly, the State will tell you what you have to do.”
And this increased control goes further, with Thomann saying the scope of government auditors will significantly increase under the proposals. This will include the power to demand full disclosure from pension fund trustees, meaning opening up their personal accounts to public scrutiny.
This invasiveness in itself could have some unintended conse-quences, namely that trustees may say enough is enough. Dr Ruben Lombardi, member of the manag-ement committee at LCP Libera believes that this could indeed drive good trustees away. “Generally trustees don’t get anything for the work they do and they do a good job, and if it starts going like that, where you will have to open your personal reports as to what shares you have and so on to the auditors, the interest in engaging yourself in these things will dramatically decline.”
Another unintended conse-quence may come from new man-ager rules. Wyss explains: “A lot of Swiss pension funds have asset managers abroad. And usually the contracts are not according to Swiss law. Now they ask that all contracts have to be according to Swiss law and the asset managers have to be ruled by the Swiss banking authority, or a similar one abroad. So that means you can’t have unregulated managers in the pension fund industry in Switzerland. In other words, no hedge fund managers.
“I’m not sure if this was the target but let’s just say if you lose money you can do so with blue chips, you can invest in Japan and [recently] you’d have lost 10 per cent. But if you lose that in hedge funds then you are a suspect.”
And this is probably the other biggest complaint about the proposed changes; the implication that if you work in the pension fund industry you are in some way corrupt, and rules must be put in place to curb your illegal desires.
Indeed, one of the major stated reasons for the reforms is to combat fraud within the system, but the system doesn’t really have that much fraud to begin with. As Lombardi points out: “If you look at the fraud carried out in the years since the second pillar was installed you can maybe count it on the fingers of one hand.
“This is a belief that the more rules you have the better the system works,” he says. “But reality has shown that having more rules doesn’t mean things work better. You need good rules; it’s not a case of the more the better.”
Beyond fraud, the Swiss gove-rnment may have another reason in mind for going at the system so hard. There was a referendum held in March of last year to determine if the country’s conversion rate, when capital is transferred into pension, should be lowered. Government understandably wanted to lower the rate, as longevity and low interest rates made it unsustainable, but the public vote went massively against this; understandably as people didn’t want their retirement benefits reduced.
“Now the government is using that as an excuse, saying it is clear from that vote that the population has lost its trust in the second pillar and the way it’s administered, and we will make sure that we can re-establish this trust,” says Thomann. “And the way you do that being the state is you add an awful lot of rules and things you have to do and comply with and a lot of those are nearly impossible to turn into practice. That’s the mind-set. The population has lost trust and we need to take action to re-establish it.”
Thomann says that this is an unlikely scenario, and the fact that the general population has continued to buy into the second pillar demonstrates this. More likely is that following the banking crash in Western countries and in Switzerland, citizens were asked to bail out the banking sector through their taxes, a sector that subsequently paid out large bonuses. “In that context you ask people if they would agree to reduce their own benefits. That was the debate. That was their way to express their dissatisfaction in general, and as a citizen you do not have a thousand opportunities to do so. We think the government is using this as an excuse to take action.”
As the consultation has now closed, it is a waiting game to see if the Swiss government will take criticism of its plans on board, or if its reaction will be along the lines of ‘if you disagree with the plans, you must be guilty of something’. “I think you have to go back to square one, look at the law again that was passed by Parliament, and say what do we really have to rule on now,” says Wyss. “Usually in Switzerland you regulate the minimum, not the maximum. Usually you trust people and if they don’t do their job correctly there are measures taken. Now it is the other way around, you are always a suspect now. If you work in the pension fund industry you are already guilty.”