B+B for good pension provision

Pensions in Switzerland - Pensions Reform: Yes, but ...

Ottawa Barbara — 2011-06-22T00-00-00Z

Pensions in Switzerland - Pensions Reform: Yes, but ...

Impressum: Barbara Ottawa, Investment & Pensions Europe in IPE.com, june 2011, pages 38 - 49.

Swiss occupational pension reform is on schedule but the industry does not agree on how to implement ist, 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.

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A question of faith

Ottawa Barbara — 2011-06-01T00-00-00Z

A question of faith

Impressum: Barbara Ottawa, Investment & Pensions Europe in IPE.com, 1 june 2011.

"We want to strengthen faith in the second pillar," the Swiss government frequently points out when defending its plans for structural reform of the Swiss mandatory occupational pension system. But according to the Swiss pension fund association ASIP, it is not individuals’ faith that needs strengthening.

Prior to its annual member conference in May 2011 the association commissioned a survey among 1,000 Swiss above the age of 15, which showed that faith in the second pillar has grown since 2009.

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Swiss reform consultation draws heavy response

Billingham Dan — 2011-03-17T00-00-00Z

Swiss reform consultation draws heavy response

Impressum: Dan Billingham, Pension Funds Online in pensionfundsonline.co.uk, 14 march 2011.

SWITZERLAND – As many as 500 responses have been sent to the Swiss government’s consultation on controversial second pillar reform, Pension Funds Insider can reveal.

Certain sections of the reform have sparked sustained and fierce criticism from the industry since they were proposed by Parliament in March 2010, with major concerns being that new regulation will affect performance through added cost and bureaucracy.

Herbert Brändli, President of the Board at the €1.4 billion Profond multi-employer pension fund, told Swiss newspaper Sonntagszeitung that from his viewpoint “employees are being dispossessed by the state. The occupational pension reforms will raise savers’ contributions at the same time as reducing returns.”

The Association of Swiss Pension Funds (ASIP) has been campaigning vociferously against part of the proposed reforms, and their Director Hanspeter Konrad accused the government of running the risk of missing its objectives.

“It will be employers and employees who bear the extra costs and even greater complexity. Whether that is the right way to build trust is doubtable,” said Konrad.

The reform was proposed with the intention of boosting transparency and preventing abuse of the system in the wake of a major corruption scandal at the Zurich civil servants’ pension fund BVK. Headline features include spot checks by auditors on pension fund accounts and a proposed national pension regulator that would compliment existing cantonal regulatory bodies, complete with a ‘Mr. Pensionskasse’ tsar. These will be unnecessary and expensive, say the funds, whilst the legislation could severely restrict trustee’s room for manoeuvre.

Herbert Brändli told Pension Funds Insider that the plans “mark a temporary completion of the irrepressible wrath of legislation unleashed back in 1985” that proscribed minimum returns and set detailed conditions on structure, asset allocation, risk and financing. The number of retirement funds in Switzerland has dwindled from 17,900 to 2,300 in the 25 years to 2010 under a sustained wave of consolidation, making pension funds twitchy at the prospect of another major reform.

Brändli added: “Experts estimate the new laws will lead to increased annual costs of 100 to 200 Swiss Francs (£63 to £130) per member. That will hit small and medium enterprises with small pension funds especially hard.“

"The proposed law covers important and acceptable measures to build trust,” continued Brändli.

“Additional edicts that are being discussed are, however, way off-target, over-the-top and even contradict the government’s purpose. Adding more regulation to both an ineffectively overregulated regime and bodies that have not been able to prevent the odd scandal in the past will add to complexity in the system and reduce trust as a result.”

One of the 500 responses was sent by the €11 billion fund of giant supermarket chain Migros, whose President Jörg Zulauf and Chief Executive Christoph Ryter stated: “We would like to put on record that in a liberal society, new, carelessly considered regulations should be avoided. The edicts on the whole represent a false signal in their current form and we request that the edicts are rigorously revised.”

The head of Schindler Pensionskasse Mario Passerini asked in a response for the whole of the proposed legislation to be delayed for a year in order to rework the controversial elements of the reform. Passerini echoed the common complaint of the proposals “seriously reducing the decision-making capacity of trustee boards” and worried that “the only people to profit would be those controlling the new regulations and the heavily overpaid workers at the new supervisory authority”.

Independent advisory firm allvisa on the other hand sent in a response that zoomed in on concerns that one-size fits all regulation would severely limit trustees room for manoeuvre, writing: “The autonomy and individual responsibility of pension funds is being further threatened with a gulf between the capacity and responsibility of their leadership being widened. Pension funds are to be issued a corset that will constrict them fatally and fail to accommodate for the differing requirements of funds.”

The mammoth €22 billion Publica Pensionskasse, one of the top 100 global funds, picked up on the theme of averting further corruption scandals in its response, with President Hanspeter Lienhert writing: “Without doubt it is a valid objective to avoid abuses in the second pillar. Even more detailed (over)regulation will not be able to prevent all abuses though, as not all cases can be foreseen and therefore prevented. Instead of issuing countless guidelines the generally valid and more important codes of conduct can be clarified, for instance with reference to the ASIP charta and recommended practice, or by making them universally binding.”

The Federal Social Insurance Office, the state body that developed the proposed reform out of its interest to represent savers, defended its work in an interview that Director of Retirement Provision Martin Kaiser gave to Schweizer Pensions- & Investmentnachrichten. The top civil servant said: “The structural reforms will improve transparency and bring about a cultural change. Pension funds that work well have nothing to worry about.”

Kaiser added: “Good governance should not always bring cost as it helps to lower costs in the medium to long term. A few reactions have erred from the facts and forget that most of the criticised points have been decided by the legislator long ago.” He compared the new auditing rules to laissez-faire Swiss ticket inspectors who keep travellers on their toes by paying infrequent but notoriously strict visits to buses and trams, and said that costs for the new regulator would be no more than what funds currently pay in their ASIP association duty.

Kaiser also implied that pension funds’ determined opposition might be neglecting the interests of their members by stating: “When working on the second pillar you have to make a clear choice between mine and yours. It is legitimate when legislators strengthen the appropriate laws as the most important asset of all is the trust of savers.”

The Federal Department of Home Affairs in Bern will have plenty of reading in the weeks ahead as they sift through the 500 responses. Spokesperson Barbara Brosi told Pension Funds Insider that around half of the 500 submissions are identical copies of one pension fund’s ‘print and send’ complaint, while another 100 exactly followed the scheme of a response that ASIP urged its members to post to the department.

“It can be stressed that the necessity and the stated goals of the reform are not being contested in the consultation. On points of implementation on the other hand, opinions differ, which is hardly surprising due to the high complexity of the matter and range of interests in the pension market,” said Brosi.

He added that a report analysing the responses is due to be put for discussion before the Swiss Federal Council in the summer and a decision will then be made on whether to reflect the concerns of pension funds in the final version of the legislation.

That may not quieten Swiss pension politics for too long, however, with future changes to the system seen by many as an inevitable consequence of a rejection of plans to cut conversion rates for retirees in a March 2010 referendum. The shape this future may take is currently, and will continue to be, a source of lively debate.

Swiss ECOFIN co-founder's views on passive investment 'naïve'

Ottawa Barbara — 2010-07-07T00-00-00Z

Swiss ECOFIN co-founder's views on passive investment 'naïve'

Impressum: Barbara Ottawa, Investment & Pensions Europe in IPE.com, 7 july 2010.

SWITZERLAND – Herbert Brändli, head of the €2.2bn Swiss pension fund Profond, has slammed a recent article written by industry expert Martin Janssen and rejected the notion that active investment in particular lends itself to criminal activity in pension funds.

Janssen – co-founder of ECOFIN and a professor of finance and economics for more than 35 years – recently reignited the active-versus-passive debate after suggesting in the Zurich daily Tages-Anzeiger that passive investment could minimise corruption in pension funds, referring specifically to the ongoing scandal involving the Canton of Zürich civil servants fund (BVK).

In his interview with Tages-Anzeiger, Janssen suggested four improvements to the Swiss pension system: “First you need good organisation. Second, mandates should only be awarded on competitive terms. Third, good inter-personal skills.

"Fourth, a head of investments should invest passively to the greatest possible extent – that means not in individual stocks, but in entire indices, such as the SMI [Swiss Markets Index].

"The job of an investment head would become deadly boring, although that would be a good thing."

Janssen also suggested a split in personnel between principal, agent and controller, and said pension fund trustees should be better remunerated, although pension fund investment staff should be paid less than investment professionals in the asset management or banking industries.

He also warned against consultants who market actively managed products, but receive a hidden fee.

"Unfortunately, this still happens, even at large funds," he said.

But Brändli questioned Janssen's logic.

He said: "It is naïve to think the problem at the BVK – where a weak personality and criminal energy led to members' funds being siphoned off – could have been solved by going into indirect or passive investments instead of direct ones.

"Passive investments deprive investors of control over their allocations – what Swiss pension funds really need is a professionalisation on the management level."

Brändli pointed out that investing passively would have made it impossible for his fund to disinvest from UBS in 2008 and thus avoid subsequent major losses.

He added that "liquidation waves" from fixed-income indices of bonds issued by the PIIGS-states were yet another problem association with passive investing.

Similarly, Swiss asset manager Swisscanto pointed out that index investments often carry extensive concentration risk, which had to be taken into account.

Gerard Fischer, chief executive, said: "Credit Suisse and UBS made up 21% of the Swiss Blue-Chip-Index SMI until mid-2007 – after the financial crisis, their share had dropped to 11% at the beginning of March 2009."

Swiss funds shying from their core business – Profond

Ottawa Barbara — 2010-05-20T00-00-00Z

Swiss funds shying from their core business – Profond

Impressum: Barbara Ottawa in IPE.com, 19 may 2010.

SWITZERLAND - Herbert Brändli, head of the multi-employer fund Profond, has criticised the growing trend for Swiss Pensionskassen to shy away from longevity risk by outsourcing pensioner liabilities, promising only capital payments at retirement and switching to defined contribution (DC) schemes.

“If I see pension payments and longevity as risks then what am I doing here? This is supposed to be the core business of a Pensionskasse," he said. "As long as people are working we will continue to get assets into the pension fund." Brändli said this was enough to keep buffers filled and pensions guaranteed.

He also predicted that equities - an asset class Profond has a greater exposure to than most Swiss pension funds - would continue to return 4% annually over the long term.

Brändli has said he believes in taking more risk than is typically borne by Pensionskassen, although Profond's strategic asset allocation of 50% equities left the fund slightly underfunded following the market downturn (see earlier IPE story: Swiss pension plans to maintain strategy for good returns).

"The only major problems Swiss pension funds were suffering over the last years were because of illegal activities – so there is an operational risk, but longevity is not the problem," he said.

But Peter Zanella, head of retirement solutions Switzerland at Towers Watson, said the trend towards removing longevity risk among Swiss Pensionskassen would be compounded, predicting the current discount rate in the Swiss mandatory second pillar of 3-3.5% to come under pressure should the deflationary scenario continue. This would see liabilities increase by up to 15%, he said, and even if inflation returns, Pensionskassen would have to face the problem of financing pension indexations.

"While earlier switches to defined contribution schemes were made to achieve more transparency, we can now see more and more switches with actual cuts in benefits," Zanella said.

Profond changes fee-structure post-crisis

Ottawa Barbara — 2009-10-01T00-00-00Z

Profond changes fee-structure post-crisis

Impressum: Barbara Ottawa in IPE.com, 30 September 2009. German version by B+B Vorsorge AG.

SWITZERLAND – The CHF2.6bn (€1.73bn) Swiss multi-employer pensionskasse Profond has changed the fee structure for its portfolio managers, in a bid to reduce costs.

“In the wake of the financial crisis we have switched the management fee from one which is calculated by basis points to a fixed fee with profit share,” explained Herbert Brändli, head of Profond.

“This way, we are saving around one-third in fees and the managers have accepted this without much struggle – I was surprised as well.”

He added a basis point fee only rewarded managers for movements in the market, and not for the actual work they do.

Brändli suggested this showed there is “a lot of leeway” in manager remuneration.

Similarly, he said the fund had found a new bank with lower transaction costs although he half-jokingly claimed it might have been easier for the fund to set up its own bank for this purpose.

“The crisis has forced us to reconsider these fee structures, so in a way it was also a chance for change,” said Brändli.

In other matters, Brändli said he is convinced that a further lowering of the conversion rate used to calculate pensions will not force funds to better manage their assets but instead would just reduce the benefit level.

In a referendum, which is most likely to take place on 7 March 2010, the Swiss people will vote on whether there should be a further cut of the pension conversion rate from the current level of 7% to 6.4% by 2015. (See earlier IPE article: Swiss pension level breaches constitution – union.)

However, other experts disagree and have criticised Brändli for making discussions on the subject more difficult.

“Lowering the conversion rate is a necessary precautionary measure and socio-political wishful thinking is ill-advised on this subject,” argued Hanspeter Konrad, head of the Swiss pension fund association, ASIP, at the organisation’s annual meeting in Zurich.

He stressed this measure does “not endanger the [pension] benefit level” as the amount of money will stay the same but be spread over a longer period of time as longevity increased.

“If it is not lowered the stability of the system is in danger,” added Konrad.

He quoted figures showing the minimum interest rate for second pillar pensions had always remained above the increase in salaries between 1985 to 2007 – in effect by as much as 1.58%.

Brändli, on the other hand, argued that since 1985 the benefit level has decreased by 30%.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602.

Madoff deals Profond only a glancing blow

PK Assets AG — 2008-12-16T00-00-00Z

Madoff deals Profond only a glancing blow

The quality and transparency of Profond’s investment portfolio are faultless. Despite the sluggish economy and hesitant stock markets, the potential to generate value is retained. Thanks to the proportion of contributions to benefits, the duration and impact of the economic slowdown pose no critical risks to Profond. For this reason, Profond can avoid expensive, risky hedging of stock market and currency fluctuations via derivative products and hedge funds, and has not suffered any definitive asset losses due to the collapse of investment instruments.

We received the following statement from the asset manager responsible for Profond, PK Assets, concerning the Madoff case.

“Madoff” is a complete and accurate description of hedge funds:

Mad in the sense of crazy, insane, ludicrous

Off in the sense of gone, departed, disappeared

This latest case of client funds that have vanished into thin air on an epic scale cannot simply be shrugged off as the result of unusually high value fluctuations on the financial markets. No – this case goes much deeper, direct into the heart of modern financial capitalism. Confidence in the guidelines for economic activity on the financial markets and in market participants has been shaken to the core. After the business model of so-called investment banks was discredited, the guild of hedge funds now stands in the line of fire. Laymen and professionals alike have expressed their astonishment at how it was possible for a company that advertised itself as subject to particularly high ethical standards to produce a snowball effect capable of cancelling out the sophisticated selection algorithms used by highly paid specialists and generating a loss estimated at three times the assets announced by the institution.

Suppliers of traditional investment solutions are rubbing their eyes in disbelief. The business model of leading alternative investment providers obviously consists of collecting money, transferring it to remote locations for a hefty fee and proceeding, based on secret calculations, to promise stable, double-figure annual returns that are backed up by “past performance” with the help of a laughable auditing apparatus. These mechanisms allowed Madoff to generate a loss amounting to more than ten times that incurred in the LTCM debacle. Nevertheless, this kind of approach is no longer deemed a hazard to the system. The public has been numbed by all the news of high writedowns, recapitalizations, nationalizations and anticyclical, astronomical salaries flying around. To top it all off, the guidelines for these investment instruments and the playgrounds of the consultants who offer them are now being blithely expanded in the case of investment of pension fund assets in Switzerland.

It is inappropriate at this juncture to delight in Madoff’s fall. Instead, it is necessary to return to tried-and-tested combinations: value is generated by activities in the real economy and the production of meaningful goods, while returns are “hard-earned” through fluctuations. In his shareholder’s letter of 2006, Warren Buffet, the oracle of Omaha, taught us how risky it can be to put one’s trust in investment consultants who try and get around these basic paradigms. However, this is no new phenomenon. It is well known that in medieval times, alchemists who were urged to transform worthless materials into precious metal were also the best-paid specialists. We must therefore assume that the Madoff case will not be the last of its kind.

Profond does not invest in hedge funds. The aims of this supposed asset class are irreconcilable with Profond’s asset management principles, which demand stakes in value-generating production components of the global economy. These grotesquely expensive financial products are not transparent enough, harbour too much risk and are subject to questionable incentive mechanisms. Using these products would contradict the avoidance of leverage and short selling as outlined in Profond’s investment regulations. Nevertheless, Profond's portfolio is suffering from the development of these financial vehicles. Deleveraging in all asset classes is also making its mark on Profond’s short-term investment result. It is foreseeable that the excesses of the financial sector combined with the misallocation of scarce resources will negatively impact economic growth in the coming year.

However, the central and decisive factor is that Profond’s assets – consisting exclusively of high-quality shares and bonds – have retained their value and should reap above-average benefits from a recovery in prices. The cumulative mistakes in the financial sector – securities from big banks, structured Lehman products, low-quality corporate bonds, yield optimization products, total return products and all types of credit derivatives – have left Profond unscathed. Nevertheless, the differences between value fluctuations and losses, and the arbitrary way in which the coverage ratio of a pension fund is assessed based on a specific key date, have been highlighted by the current situation. Profond is sticking to its guns and is therefore not in search of recovery strategies.

Profond: is recapitalization necessary?

Brändli Herbert — 2008-11-24T00-00-00Z

Profond: is recapitalization necessary?

Impressum: Herbert Brändli, Pension expert, president of foundation council of Profond Pension Fund, 8800 Thalwil

No cuts in benefits

In spite of the financial crisis, persons insured with Profond won’t lose a single cent. Pensions currently being paid will not be cut, and the accumulated retirement capital of members who are still working will be maintained until they retire, when it will generate annuities at the annual conversion rate of 7.2 %. In the next few years, however, retirement capital will not generate as high a return as it has in the recent past – if the stock markets recover as slowly as eminent economists currently expect, that is.

Pension funds are generally highly resistant to market fluctuations. In the current environment, they can and should act as a stabilizing influence. They have no debts, and their current income is usually greater than the sums they pay out in benefits, as is the case at Profond. To extract additional funds from the real economy – slack as it is – in recapitalization payments to cover shortfalls caused by ailing stock markets is economically and actuarially absurd.

Recapitalization measures

From both an economic and actuarial point of view, recapitalization measures are unnecessary. Even so, the regulator will compel individual pension funds to take these measures, as it is too fixated on a constant cover ratio of 100 %. Whether any action will be taken at Profond, and what it might be, has not yet been decided. Under certain circumstances, the rate of interest credited in 2009 may be no more than the legal minimum. This would not be a serious burden on active members, and nor – taking account of the past – would it last long. Persons who have been insured with Profond for an extended period would still enjoy average returns superior to those of most other pension funds.

A zero interest credit was ordered in 2002, for example. What happened? In subsequent years, Profond was able to credit interest as follows:
2003 4 %
2004 4 %
2005 6 %
2006 5 %
2007 4 %.

If Profond had always paid out only the legal minimum interest, fluctuation reserves would have been built up instead of benefits – and today, we would have hardly any cover shortfall. However, Profond prefers to distribute profits to members in good years, suspending credits when times are hard.

Bridging versus recapitalization payments

In the event that the regulator insists on recapitalization payments, Profond plans to arrange bridging finance to meet the cover shortfall on a temporary basis. This is what we did in 2002. The “recapitalization payments” were calculated so that their net present value would restore the balance sheet to equilibrium. The additional contributions were credited to individual insured persons and made available to them again once the stock market had recovered. This meant that younger members did not have to stump up for the stock-market collapse to support the older generation, and there was no redistribution between the generations.

In the present case, Profond will again calculate the additional contribution so that its net present value will provide the cover required for a temporary technical deficit. The additional contributions are hard to estimate. However, given the current volatility of the cover ratio, they will probably be somewhere between 0 and 2 per cent of payroll. Once again, younger members will not have to fork out for this bridging finance. The recapitalization payments would again be treated as contribution reserves. Later, once the storm had passed, they would be converted to retirement credits or used to fund normal contributions.

In long-term equilibrium

Profond prepares an actuarial balance sheet as a constant check on its security. Taking a long-term view, this compares future income (contributions and investment returns) with future outgoings (benefits and costs). There is no point in updating this balance sheet every day, or even every month. It is distorted by the currently high levels of market volatility, making it useless for its intended purpose of providing a long-term perspective. Turbulence on the stock markets resulted in Profond posting a drop in performance of 13.8 % in October, while the cumulative fall from the start of the year to 31 October was 24.2 %. It’s not difficult to work out that our cover ratio at that point was below 90%, meaning Profond suddenly finds itself substantially in deficit. Nonetheless, there is no threat to our capacity to pay benefits or to withstand risk.

Investing in production factors

Profond is in a position to meet its benefit obligations seamlessly. Any further temporary deterioration in the cover ratio will make no difference to this, because we take in much more in contributions than we pay out in benefits – and that will continue to be the case for decades to come. Profond thus has a constant flow of new funds to invest. The fact that Profond concentrates most of its investment throughout the world in production factors restores our capital holdings, which both generate our income and act as a cushion for benefit obligations in the remote future, to equilibrium. Profond’s benchmark is not the stock market. We want our investments to track the performance of the global economy (6 to 8%). Accordingly, we abandoned unproductive – allegedly “safe” – investment vehicles a long time ago, thus avoiding total losses. There are therefore excellent prospects that book losses on equities will correct themselves, and the cover ratio rise, long before there is any need to break into our growing capital.

No weakening of the “third contributor”

Occupational pensions are proving highly resistant to the financial crisis, as long as they base themselves on the real economy. The question of whether the real economy – slack as it is – will have additional funds extracted from it in recapitalization payments, which will subsequently lie idle in pension funds, is becoming a matter of survival. Profond’s answer to this question is a resounding no. We are sticking to the investment strategy we have adopted, constantly adding to our holdings in promising companies as the stock market falls. This strategy is the heart of our actuarial balance sheet. It forms the foundation of the “third contributor” – our capital – which is what justifies the very existence of pension funds. This third contributor must not be weakened without extremely good reason.

The long-term orientation of the pensions field gives us our risk capacity. The only factor that restricts it is a liquidity bottleneck, which can force investments to be realized at the wrong time. If the long-term character of investments and liabilities is compromised for no good reason, this may lead to financial difficulties on the liability side, namely on switching pension foundations. This risk cannot be effectively countered with recapitalization payments. There are grave systemic defects in the legal provisions relating to vested benefits that must be stamped out. We have the financial crisis to thank for bringing these to light. Now is the time to put an end to them once and for all.

Pension funds are easy prey

Strahm Rudolf — 2008-11-23T00-00-00Z

Pension funds are easy prey

Impressum: Article by Rudolf Strahm, former National Councillor and price watchdog, published online on the Zürcher Tagesanzeiger newspaper website on 18 November 2008, in the Kolumnen und Kommentare section. Translation by B+B Vorsorge AG

The chapter in the global financial crisis that will prove the most expensive for Switzerland is yet to come: the pension fund debacle.

By the end of 2008, Swiss BVG pension institutions are set to post losses of between 80 and 100 billion Swiss francs. Hundreds of pension funds will have to announce a substantial capital shortfall. In coming years, both employees and employers will have to cough up a higher contribution in terms of salary to cover the difference. However, many of these value corrections are simply book losses, as in the case of shares, which should correct themselves in the next few years.

Nevertheless, it is estimated that actual losses in retirement assets amount to tens of billions of Swiss francs. These losses originate primarily from investments in hedge funds and structured products (which already accounted for CHF 40 bn of pension fund assets back at the end of 2007), absolute return funds of the big banks that have suffered large losses, and collateralized debt obligations (CDO), the latter two of which are falsely labelled in terms of their names alone.

Substantial shifts

It is an ironic quirk of fate that, on 19 September 2008 – right in the middle of the financial crisis – the investment guidelines for pension funds were relaxed. In revising the BVV2 Ordinance on Occupational Retirement, Survivors' and Disability Pension Plans (with effect as of 1 January 2009, to be fully implemented by the end of 2010), the Swiss Federal Council has, of all things, increased investments in hedge funds and structured (i.e. speculative) products to 15%, while reducing investments in real estate from 55% to 30% and those in mortgage loans from 75% to 50%. In extreme cases, this means that pension funds must transfer their more secure investments in property or mortgage loans to less secure ones such as shares and structured products – an economic outrage in view of what we have seen during the financial market crisis.

This deregulation will lead to investment types with increased risks, increased speculation and less credit. After all, mortgage loans and capital investments in real estate have for more than a decade proven to be more secure and, in the long term, more profitable than shares or so-called "alternative" investments such as hedge funds.

Back-room decisions

Those set to benefit from the planned shift in investment patterns are the big banks, hedge funds and investment consultancy companies. Swiss Federal President Pascal Couchepin was the person on the Federal Council to formally request a relaxation of the regulations. The parliamentary commissions were neither consulted nor briefed beforehand. The driving force behind the change was the ominously named Ausschuss Anlagefragen (investment matters committee), composed of members of the BVG commission and external representatives of Switzerland’s marketplace.

This eleven-strong committee was responsible for concocting the new investment strategy and literally forcing it through the BVG commission. If you now question members of the commission who are not in the committee, they all claim to have had a “bad feeling” about the entire matter and to have sensed that those involved were “out of their depth”.

The Ausschuss Anlagefragen was dominated by the financial community, consisting of five representatives from banks and insurance companies (UBS, Pictet, Credit Suisse, Swiss Re, Axa Winterthur) and two representatives from investment consultancy companies (PPCmetrics, KPMG). Representatives of the Swiss government (two) and of social partners (one of each) were in the minority.

The committee was headed by Dominique Ammann from investment consultancy PPCmetrics, which has a hand in the pension fund business. Ammann and his company will profit directly from the new investment guidelines, as the changes in the investment mix and the transfer of increased responsibility to governing bodies of pension funds will, from the point of view of independent experts, entail a huge increase in the need for external consultancy services.

Banks and consultancy firms will profit

This is exactly what Ammann’s consultancy company is taking advantage of: PPCmetrics states the following in large type on its French and German websites under the heading of “Revised BVV2 investment guidelines”: “PPCmetrics will help you comply with the new BVV2 investment guidelines”. What it fails to mention is that pension fund consultancy services of this type cost CHF 400 per hour. PPCmetrics aside, consultants are not obliged to declare the commissions and kickbacks they are granted by banks.

Following this deregulation coup, what can be done? The National Council commission for social security and health (SGK-N), which only recently acknowledged this done deal, requested a report from the Federal Council at the beginning of November. The Council of States commission will soon have a similar opportunity. The strategy should be as follows: to not implement the revised BVV2 ordinance on 1 January 2009, to get Parliament involved, to carry out a broad consultation and then, if necessary, a broad-based revision.

Our 600 billion Swiss francs in pension fund assets have been scraped together through forced savings implemented by law. It is therefore a public obligation to set limitations for the pension funds with their joint and often unprofessional, rigid boards of trustees by enforcing a conservative investment strategy. Pension fund assets are the longest-term investment of all – meaning they are not compatible with structured and speculative products, unsecured investments in US dollars, and actively managed investment funds. No one except the banks and investment consultants profits from this.

Four percent interest on retirement assets – how do you manage that?

Brändli Herbert — 2008-10-27T00-00-00Z

Four percent interest on retirement assets – how do you manage that?

Impressum: An interview from the Finance section of the “Blick” daily newspaper: Silvio Bertolami talks to Herbert Brändli, Chairman of the Board of Trustees at Profond Pension Fund, an independent collective foundation for SMEs. Interview date: October 27, 2008 from page 11 of "Blick".

Mr Brändli, can you still sleep at night?

Yes, I sleep well, but not much. We are currently confronted with numerous issues and worries that are costing us time. The financial crisis has made our insured very uneasy, and is weighing on them heavily.

But aren’t they right to be worried? After all, you invested half of your pension fund assets in shares that have fallen heavily in price.

These are simply book losses, which we are not overly concerned about. In the short term, the main thing is that enough we have enough money in our coffers. And this is the case at Profond. In fact, Profond has more liquid assets today than before the financial crisis. We are recording a substantial inflow of new funds. Our solvency, and thus pensions and vested benefits, are not at risk – despite the bad situation on the stock markets.

Due to the great number of shares, your cover ratio has fallen to under 90 percent. A cover shortfall of 10 percent or more – is this really no reason to get worried?

On this very day, our cover ratio most likely stands at under 90 percent. However, the short-term position of our cover ratio is completely irrelevant. After all, the ratio fluctuates due to turbulence on the stock markets – sometimes it is better, sometimes worse.

Why do alarm bells then start to ring at most pension funds when the cover ratio slips below 100 percent?

I consider this reaction unnecessary, even absurd. The decisive factor is that our capital stock exhibits long-term growth. For this very reason, our strategy focuses primarily on shares, not bonds. In the long term, earnings from shares are at least 3 percent higher than for bonds. Through our shares, we are co-owners of productive companies. This means we benefit from the growth of the world’s economy, and will continue to do so. In the past, the world’s economy has grown at an annual rate of 6–8 percent.

Are you still buying shares yourself?

Yes – as we still have surplus liquidity in our pension fund, we can constantly acquire stakes in good companies at highly favourable prices.

Unlike Profond, most pension funds invest primarily in bonds. What are the consequences of this?

The yields from bonds are barely sufficient to cover inflation in the long term. Due to this type of investment, the minimum interest rate has to be cut, as does the conversion rate. In contrast, our conversion rate still stands at 7.2 percent.

And what interest rate do you intend to pay on retirement assets for 2008?

I want to pay 4 percent. However, the authorities may not permit it.

4 percent interest, despite a large cover shortfall – do you enjoy living dangerously?

In the early 1990s, as a result of the real estate crisis, our performance dropped 14.5 percent and we had a cover ratio of well below 100 percent. Despite this, we were still legally obliged to pay 4 percent interest. Profond’s insured did not suffer as a result. Furthermore, we also successfully overcame the shortfall in 2002 without cutting benefits, and with no additional costs to our insured.

(Adaptation française : Yve Delaquis / caralingua.com)