The Swiss federal office of social insurance last month published new investment regulations for the Ordinance on Occupational Retirement, Survivors' and Disability Pension Plans (BVV2). They will come into effect on 1 January 2009.
Under the Swiss system, pensions are governed by the Federal Law on Occupational Pensions (BVG), which was passed by parliament in 1985 and had its first revision in 2005. This states that the Federal Council, the cabinet, can pass an ordinance giving further details. This is the BVV2.
The modifications to the regulations are intended to address the issue of governance and at the same time to relax and simplify the investment rules for pension schemes, according to Roland Guggenheim, an accredited pension actuary with Mercer in Zürich.
And for the first time the regulations say that pension funds should follow what the social insurance office calls the prudent investment rule. However, at the same time it details revised quantitative investment restrictions. "Pension funds were used to limitations so the message implicit in the new regulations is that on the one hand you have the limitations to help with your investments, you are used to them so you can continue with them, " says Guggenheim.
"However, on the other hand even if you follow these limitations you must till adhere to the prudent person rule, so you are not relieved of your responsibilities if you just follow the regulations. It a half-way house with a bit of both approaches, it's typically Swiss."
The changes involve 10 of about 100 articles in the BVV2, he adds.
The key changes introduced by the BVV2 amendments include making boards of trustees responsible for a comprehensive structuring, supervision and governance of the investment process. The role of the trustee committees was not so clearly specified before, says Guggenheim.
But while on the one hand it tightens up the regulations as far as trustees are concerned, on the other it relaxes and simplifies the investment limits.
Now a pension fund can invest a maximum of 50% of its portfolio in equities, leaving the total unchanged but simplifying the detail. Up until the end of this year domestic stocks could be up to 30%, but not more than 10% per company, and foreign stocks could be up to 25%, but not more than 5% per company. Under the new regime a maximum of 5% of a portfolio can be invested in a single stock, irrespective of whether it is domestic or foreign.
A similar ceiling is set for a single real estate investment. The maximum mortgage debt is 50%, down from 75%, and maximum real estate investment is put at 30%, of which up to one-third can be foreign and only 30% mortgage loans.
And bond investments have been simplified. A pension scheme can invest up to 10% of its assets in a single bond issuer, again whether domestic or not, down from 15% for a domestic bond issuer and up from 5% for a foreign bond issuer.
And for the first time the regulations allow investment in alternatives, setting a ceiling of 15% and allowing only investment funds without liability for further call.
Up to 30% can be in unhedged investments in foreign currency. Addditionally, investments in the sponsoring company is unchanged from the previous regulations at 5% but a new ceiling of 5% placed on investment in property used by the sponsor's business.
However, the fact that regulations can be extended continues a much-criticised state of affairs.
The BVV2 contains a basic contradiction, notes Theodor Keller, a pensions consultant at Hewitt in Zürich. "On the one hand it says you cannot do something and then on the other, under Article 59 of the same regulation, it says you can."
The limits will still remain but there will be more flexibility in alternative investments, he adds.
"In my opinion BVV2 should be changed so that it no longer includes these limits and so that it instead applies the prudent man rules more generally.
"I think that there is still some hesitation among politicians. They feel that there must be rules otherwise pension funds will invest in whatever. I am not sure what lies behind this way of thinking. Or maybe the inertia is because the issue is not seen as being particularly urgent by the government."
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