When SAir Group, the owner of the former national flag-carrier Swissair, revealed that it had placed a third of its pension fund surplus on its balance sheet early in 2000 it started a debate about Swiss pensions that has still to be resolved.
The debate centred on the legal status of the Swiss Pensionkasse, the mandatory second pillar pension system, and in particular whether it was a Beitragsprimat, a defined contribution (DC) scheme or a Leistungsprimat, a defined benefit (DB) plan.
The conclusion was a typically Swiss compromise. The actuaries decided that the Pensionskasse was essentially a DC scheme, but not a DC scheme in the Anglo-Saxon sense of the word. It was a DC scheme because the scheme itself and not the sponsoring company bore the risk, but it was not a US-style scheme because the risk was borne collectively rather than individually.
Werner Nussbaum, the Swiss pensions expert who took charge of the legislation that led to the introduction of the LPP/BVG mandatory second pillar pension system in 1985, says the distinguishing feature of the Swiss DC plan is that the fund rather than the individual bears the market risk. “In the US, 401(k) schemes the individual has to take on his own shoulder the risk of the capital market In Switzerland the bearer of the risk is always the pension fund. That’s very important.”
Nussbaum says that the DC scheme is, in fact, a DC/DB hybrid, created largely for political reasons: “It’s the outcome of a long and hot debate and was a compromise between the unions, the pre-existing pension funds, the companies and employers. At first, the government brought in a bill providing defined benefit plans, and there was a huge debate in parliament. Then, after the oil crisis of 1974, parliament changed the Bill in favour of defined contribution but with an element of defined benefit.”
The hybrid system allowed employers some leeway when choosing a scheme. Claude Chuard, a Berne-based pensions consultant and member of Innovation Second Pillar, a Swiss pensions think-tank, points that “the 1985 law did not take any position about whether an employer has to set up a defined benefit or defined contribution plan. There was no prescription. Of course the law had a certain impact because the law was much nearer to a DC plan than a DB.”
However, the Swiss DC plan was quite unlike DC plans in the US and UK. Graziano Lusenti, executive director at Robeco Asset Management in Geneva, suggests the only real equivalent of Anglo-Saxon DC plans in Switzerland is to be found in the third pillar private savings schemes. “There is pillar 3a fiscally privileged savings and there is pillar 3b which is fiscally unprivileged savings. In the field of 3a you have full freedom to make payment into a scheme whereby your contribution will be tax-deductible. And I think the best equivalent to 401(k) plans in Switzerland are not to be found in the second pillar but in the fiscally privileged savings plan.”
Mike McShee, actuary at pension fund consultants Buck Heissmann in Geneva, says: “Essentially what they designed was a cash balance plan. The cash balance plan has similarities to the LPP/BVG. The LPP/BVG defines a retirement credit for each year of service and it defines a guaranteed rate of interest of 4% to be applied to the retirement credit to define the guaranteed retirement capital.”

But there are important differences between the mandatory Swiss pension plan and a cash balance plan. The 4% guarantee of the LPP/BVG is a minimum guarantee, whereas the cash balance guarantee is an exact guarantee – the plan member will receive no more and no less. Furthermore, the LPP/BVG assets can be transferred to a new employers’ plan or, in some cases, to the individual. In a cash balance plan the accumulated assets remain in the plan even when the plan member leaves the company.
Crucially a cash balance plan expressly stipulates that the employer is the beneficiary of any excess return. In the LPP/BVG, the employer has no claim on the excess. The plan members are the sole beneficiaries.
This was the objection to SAir Group’s action in 1990. SAir Group argued that, since its pension scheme was essentially a defined benefit plan where the employer bore the risk, it was entitled under international accounting standards to move some of its pension surplus on to its balance sheet. Swiss accountants initially backed this position. “The FER, the standard setting body of Swiss accounting profession, originally came down on the side of basically saying every plan is essentially defined benefit,” says McShee. “It’s an extreme position and one that we didn’t agree with.”
Subsequently, FER shifted its position to take account of the spectrum of possibilities between DC and DB. “The revised FER standard has ended up in a typically workmanlike Swiss way which admits to the exercise of judgement and the examination of the facts and circumstances of a plan. But it actually leaves the door open for nearly all the Swiss plans to be treated as defined contribution,” he says.
The question of whether a plan is truly a DC plan or a DB plan in disguise may be resolved only when companies begin to report shortfalls in their funds following unfavourable market conditions, says McShee. “We are going to see cases of companies where the pension fund has ended up with a shortfall and they will have to do something. If the company comes up with the money to repair the damage, the accountant will be able to say you’re really a defined benefit plan. But if the employer stands back and doesn’t put in and the pension fund has to repair the damage by adjusting the benefit, the company will be able to tell the accountant ‘I told you so. I’m a defined contribution company.’”
Whatever the difficulties about definition, the trend in Switzerland has been progressively in favour of some form of DC scheme and currently 70% of pension funds in Switzerland are DC schemes. The latest figures available from the Office of Social security show that, of a total of 3,745 plans in 1998, 3,127 have been DC plans and only 618 DB. Over 2.3m people belong to DC plans compared with 837,000 in DB schemes.
McShee suggests the Swiss hybrid could provide a model for other countries. “Switzerland may be a kind of pensions laboratory for the exploration of how pension funds really work can work and should work.”
Nussbaum agrees. “Organisations like the World Bank, the IMF, the EBRD and the ILO are all recommending other countries to look to Switzerland for the concept of three pillar and this hybrid pension system of the second pillar system.”

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