Behind the UK and the Netherlands, Switzerland is the third largest occupational pensions market in Europe. Although a mature market, the authorities are facing a demographic time bomb, in common with many other countries.
Both the federal and canton authorities are eager to address the situation, and have initiated two reviews of both national basic old age pension and occupational provision during the past 12 months. The former is a well established review of the system, the 11th of its kind, whilst the latter is the first review of the BVG (the law relating to occupational pensions).
The BVG, amongst other regulatory issues, specifies a minimum investment return and a conversion rate for turning the contributions into cash. The government is thought to be keen to lower the latter figure, now set at 7.2%. With regard to the minimum investment return, few scheme members seem to be too concerned about alleged poor performance. This may be because in defined benefit schemes the company assumes the risk, or because lower paid workers are less concerned about their occupational scheme.
The two authorities also have an interest in the taxation issue, as Swiss residents are taxed at both federal and cantonal levels. Because of this, tax burdens depend upon where the employee is resident, and this means that tax paid varies from region to region. To make things a little more complicated, this means that the tax band is determined by where the employee lives and not where his employer’s head office is for tax purposes. Nevertheless, contributions towards BVG pensions are fully tax-deductible, with the employer’s contribution set at a minimum of 50% of the total cost.
The role of occupational pensions is slightly different to many in Europe, as this is a compulsory provision for anyone with an annual income of over Sfr24,120 (e15,800) in 1999. This covers almost three quarters of the workforce of 4.3m. As in the Netherlands, this explains the relatively modest public pension provision. This is between 20% and 40% of average earnings, with contributions being split equally between employer and employee in the case of most benefits. These cover retirement, survivor, disability and unemployment benefits after minimum contributions of one year. Retirement pension consists of a flat-rate benefit with an added earnings-related input. The aim is for all citizens to achieve via their state, occupational and personal pensions some 60–75% of salary.
Surprisingly, given the prevalence of occupational plans, there has been some criticism of their nature. Lack of transparency and low returns are just two of the problems that critics highlight.
A review of the system is clearly overdue, especially given the problem of an ageing population and longer life expectancy. Strangely for such a well established market there are issues that many feel need to be addressed. The lethargy that has marked the move to defined contribution plans, and the reluctance to lift investment restrictions are two of them. Both these matters have been tackled, however, in the most recent review of the BVG. The former problem has been addressed by some of the bigger funds.
Investment restrictions are another matter, and clearly the book is no yet closed on the approach that the government will adopt. The most recent attempt to tackle the problem took place in April of this year. Although it was not quite the radical move which some observers hoped for, it may have changed the way in which funds look at investment. The review is continuing and more news is expected before the end of the year.
The list of investment restrictions is fairly comprehensive, with investment in equities limited to 50% and foreign investment tied at 30%. Anyone expecting a major change in April was disappointed, but some fund managers believe that the new regulations may allow a “back door” change. What the new regulations mean is that fund managers can elect a particular strategy without consulting the regulatory body for permission. Whether this really provides an atmosphere for change will depend to a large extent on the managers themselves.
What the rule change will mean is that although “soft restrictions” are still in place, vis-à-vis investment placement in equities and foreign stocks and currency, funds may breach those limits if they can show that they can afford the move and are taking investment risks into consideration. Evidence suggests that funds are approaching consultants to ask how they might increase their exposure in certain areas, without falling foul of the regulatory body.
Alternative investing is also an emerging trend. With the new legislation allowing investment in venture capital in non-Swiss companies, many consultants believe that this could herald a whole new asset class. If the belief that alternative investment is part of a strategic asset allocation strategy for a pension fund gains a foothold – as it has in many other countries with an Anglo-Saxon approach to the markets – the larger funds will probably follow that route. Although there are around 1,000 occupational plans in Switzerland, the top 50 occupy most of the ground, some would say a disproportionate amount, as they represent the largest public and cantonal funds.
In line with EU countries, Switzerland will also have to face the problems of choice, that is to say portability between schemes, and the unequal treatment of working wives and single people. However, even the fiercest critic of the system would have to accept that these issues have at least begun to be addressed in the past few years, and will almost certainly form a substantial chapter in the review expected later this year.
Nonetheless, the Swiss authorities still stand accused of being too cautious in their review. The BVG assessment is still winding its way through the corridors of power, and the ASIP, formed after the merger of the five former Swiss staff providential associations, and representing 1,580 public and private pensions schemes, is still concerned that the federal government is not keen to allow the liberalisation of the pension system. Given the gradual loosening of the reins over the past year, however, the government may well find that the horse has bolted, and that the greater autonomy of the funds means they will now map out a new future for themselves.