Switzerland’s Sfr16.8bn (e11.4bn) pension fund for civil servants of the Canton of Zurich (BVK) closed its defined benefit (DB) scheme and become a defined contribution (DC) plan in January 2000.
The move was part of an ongoing project to become an independent legal entity by 2005, which could see the fund move into offering third-party management and investment/pension services.
The fund has approximately 50,000 active members and 15,000 pensioners. All the former members of the DB scheme remain in the same fund, with new employees as of January 2001 offered the DC option only.
The change, from 1 January, was apportioned to the diversification in modern work culture and its effect on public sector employment. The fund argued that with DC, the contribution side of the fund became more transparent while there is only one account that you pay into. The scheme had already planned to switch over the DB scheme in 1997, but had been unable to do so due to information technology structures.
BVK says that there will be no dramatic changes in the fund’s asset management approach as a result of the change. The fund had been worried that some employees who had been in the pension plan could move to insurance companies and banks, which have put up a strong fight to attract these clients. In the end though only a handful of employees left the scheme.
Currently, the BVK is part of the directorate of finances at the Canton of Zurich. The history of the fund’s shift to where it is today is indicative of that of many civil service pension arrangements around Europe.
Up until 1975, the division of the fund’s assets was remarkably simple and conservative – 75% took the form of a loan to the state while approximately 25% was run on a current account basis. In 1975 the fund began to diversify its portfolio into domestic share investment and property holdings.
By 1990, the fund was introducing asset liability management to match the liability structure of the BVK plan. The scheme also purchased a modern portfolio information system as part of the move towards an efficient infrastructure.
A year later, the fund was picking up steam in its professionalisation push with the introduction of benchmarking to a standard market reference rate and subsequent monitoring on a monthly basis with performance measurement.
Target-oriented management and supervision of the investment process by an external controller also became the order of the day. Half-yearly audits provided by the investment controller on asset management within the framework of strategy model implementation.
By 1992, the fund had selected a global custodian, diversified into foreign currency bonds and published its first annual report. A year later, diversification was made into foreign shares on an indexed basis, while the following year, a private equity allocation and a currency hedging strategy were both implemented.
Earlier this year the fund scrapped the currency overlay mandate, citing disappointment with the results compared to the cost of the programme. Conversion to accounting for capital investments according to market values took place in 1995 and in 1996 the fund also diversified its investments into emerging markets through a funds structure.
Annual statements were now being produced in German and English. Simultaneously, BVK was branching out in its investment stance, adding an international convertible bonds brief to the portfolio, which would be expanded in 1999 with two further tranches of money.
The fund had also awarded four administrative mandates for US small and mid cap portfolios and then last year it did the same for domestic small and mid cap assets.
During 2000, property allocations were also made into collective investment funds in the sector. An asset allocation breakdown for the plan comes out at around 21.8% in domestic equities, 17.8% in international equities, around 14% in Swiss fixed-income and just under 25% in overseas bonds. The fund holds approximately 10% in property, 6% in cash and a further 6% in mortgage related securities.
The fund has had a number of major meetings this year on the question of its independence from the sponsoring Zurich Canton. A bill proposing the split will go before the government shortly before moving forward to the parliament.
BVK expects that it could gain independence by the beginning of 2003 at the earliest, under a similar structure to that of the Zürcher Kantonalbank.
One result of independence, according to BVK, could be that the fund starts managing third party assets for other Swiss pension schemes.

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