The dog that didn’t bark

The failure of a court case arising from the collapse of a pension fund to result in any convictions aroused little interest among the general public, says George Coats

In July this year a Swiss regional court acquitted the seven defendants in a trial that focused on the collapse of a Pensionskasse based in the canton of Solothurn during a property crisis. The collapse left a CHF200m (€123.5m) hole into which the cantonal authorities had to pay CHF73m to avoid financial damage to the 4,000 members.

But the key element of the verdict was that it came 12 years after the Vera/Pevos pension fund collapsed. William Gladstone, a British nineteenth century statesman and prime minister, once observed that “justice delayed is justice denied” but there appears to have been no sense of outrage generated by the events, or any suggestion that tougher supervision or governance should be imposed.

Charges of embezzlement connected to the 1996 Vera/Pevos collapse had been laid against ex-managers, a former supervisor and employees of local auditor BDO Visura in 2004. Subsequently, the case was dismissed as “insignificant” by a court and it only proceeded after a high court ruling obliged a regional court to hold a trial.

Since the verdict there have been suggestions that prosecutors might continue with the process, taking the case to a higher court. However, the time that has passed since the alleged offences means they will be subject to a statute of limitations by the end of this year.

“One may wonder why it comes to an end only now,” says Graziano Lusenti, managing partner at consultancy Lusenti Partners. “I would suggest that if it takes so long to get to nowhere in a case it is not such a good reflection on the Swiss legal system.”

Nevertheless, irrespective of the verdict, a possible appeal or the country’s legal system, the fact that it has failed to have much of an impact in Switzerland is one of the key characteristics of the case.

Finance is a key Swiss industry, with banking ranking alongside chocolate, cheese and Alpine scenery as images that come to mind when foreigners think of the country. And finance has contributed to the popular image of the Swiss. From the outside, they have the reputation of being prudent, conservative and trustworthy.

So it comes as a surprise to realise that the Vera/Pevos case has failed to arouse much interest, not only among the general population but also of people in the Swiss financial industry.

“The pension scheme was not so big and it has not caused a major debate at the national level,” notes Werner Enz, pensions expert at the Swiss daily newspaper Neue Zürcher Zeitung.

But what does this have to say about pension fund governance in Switzerland?

“It does not look like anybody will be penalised as a result of the case,” concedes Roland Guggenheim, an actuary with Mercers in Zürich. “And surely that is sending out the wrong message. Nevertheless, there is some feeling that, given the actual circumstances, such a thing could not happen any more.

“However, that being said, while there is a feeling that this hole is covered nobody is really comfortable that something else, something different, could not happen or that the system will be able to answer all the ingenious schemes that might arise despite the fact that supervision is now much more dense than was 12 years ago.”

Meanwhile, as the Vera/Pevos case was proceeding to no particular general interest, the Swiss financial world had been rocked by allegations of insider trading around a 2005 merger between two Swiss banks, Swissfirst and Bellevue.

After the merger was announced, a number of Swiss pension funds were found to have invested in Swissfirst, which was surprising in that its shares had not been notable for their performance. But the funds then sold their shares shortly before the announcement of the merger, which saw their value surge.

In the aftermath of the disclosure a number of pension funds were investigated and the First Swiss pension fund was liquidated. In addition, the case introduced a financial term into the lexicon of the general public - parallel running. This is where a pension fund manager buys a small-cap stock with a very low market capitalisation on his own account, buys options with a high leverage then, possibly acting with other pension fund managers, buys the same stock for the pension fund, thereby boosting the stock price, before liquidating his personal position.

The scandal prompted the president of Switzerland’s central bank to claim there were far too many pension funds, and to characterise many who ran them as incompetent.

For Christoph Ryter, president of the Swiss Pension Fund Association (ASIP), this was unfair. He subsequently made the point that, because it revolved round the merger of two banks, the Swissfirst case was more a banking supervision issue and so not a pension fund matter, even though the media presented it as such.

And perhaps that was the key factor that differentiated Swissfirst from Vera/Pevos. The Swissfirst case was revealed by Switzerland’s most authoritative newspaper, the Neue Zürcher Zeitung. As such it reached a national audience and raised fears that policymakers would respond by tightening regulations. At the time, finance industry professionals voiced a concern that if the authorities were acting in response to public unease about supposed lax supervision, they might swing the regulatory pendulum too far the other way.

“I am not sure that, even in leading economic circles like the Swiss National Bank, that there is an awareness of the peculiarities of pension funds compared to other types of investor,” says Lusenti. “And that holds true for those in political circles as well. It has always been the case that plenty of people talk about things they don’t really understand because they are not aware of the actuarial principles involved, and how and why investments are made. This is always a danger.”

“In the event the pendulum does not seem to have swung at all,” says Enz. “For example parallel running is not yet banned. But we have had some clarifications. Front running [the practice whereby a stockbroker executes orders on a security for its own account, thus affecting prices, before filling orders previously submitted by its customers] was always illegal.

“However, there have been pro and con discussions about parallel running. The view has been expressed that as long as it involves a very liquid stock, like Roche or Novartis, there is really nothing wrong with an asset manager taking his own risk in investing in an asset, but there should be tough rules when it is a question of small and mid caps. The responsibility lies with the supervising body [Stiftungsrat] of pension funds to ensure clear-cut rules concerning execution of transactions, parallel running included.

“I think that we didn’t need to have a re-regulation or tougher rules because no major malpractices have been detected in connection with Swissfirst. There was some trouble with kickbacks in connection with an offshore hedge fund and Siemens’ Swiss pension fund manager, but it had no direct link with the Swissfirst case, it just came out at the same time. But the central allegation that the Swissfirst manager was doing an illegal deal with pension funds has been rejected. It was more a type of complex deal to combine two banks without raising capital but nothing was illegal in pension fund terms.”

“So far, there has not been any new regulation based on the Swissfirst case which in the end wasn’t that big a case anyway,” says Lusenti. “There could have been a bigger focus on the issue of governance but people realise more and more that regulation is not the way to solve problems, especially in such a decentralised system like in Switzerland where you have many hundreds of pension funds that are run by boards of trustees made up of delegates from the employer and employees. And another reason why there has not been any new regulation is due to the simple fact that the legislative system works at its own speed and it is producing new pension law anyway.”

“A structural reform about strengthening the authorities will be discussed in parliament this year and come into force in 2009 or