The Federal Social Insurance Office (BSV/OFAS) is holding out the prospect of significant changes in the ordinances on structural pension plan reform. A legal basis should also be introduced for institutional asset managers.

During the consultation process on the prospective amendment of the pension legislation ordinances (BVG/LPP), criticism had abounded. Yves Rossier, Director of the Federal Social Security Office, is now holding out the prospect of adjustments responding to the industry's key concerns. Pension funds are gaining hope.

BSV/OFAS shows understanding

In an interview with the NZZ, Yves Rossier explained that the tight schedule for the preparation of the ordinances had placed his staff under extreme pressure. Deadlines had been repeatedly shortened. As a result, the BVG/LPP commission had not been sufficiently involved in the process and certain provisions had not been fully allowed to mature. There are many rules which can still be reviewed. After all, the very purpose of the consultation procedure is to identify weaknesses.

Stronger position for pension plan members

Mr Rossi basically refuses any objections which would undermine the bases of the structural reform. Especially the rules on pension plan conflicts of interest. He explained that part of the industry operates with business models that will be outlawed by the structural reform. Some collective foundations grant mandates to members of their governing bodies or to firms controlled by such members. They will now have to change business models. The regulatory authorities often see constructions which constitute an objective risk for pension plan members. They used to have no legal basis for intervention, which is why restrictions had to be introduced.

Interest rates may be adjusted

The BSV/OFAS is reconsidering the rule whereby pension funds may not pay their members more than the minimum interest rate until reserves for fluctuation in asset values have reached their target levels and funded status equals at least 110%. But only for technical reasons. In practice, Mr Rossier warns, pension institutions which do not have sufficient reserves and pay too much interest would be distributing money they do not have. One option would be to limit the application of this rule to collective foundations.

Institutional asset managers could be placed under FINMA oversight

Pursuant to the planned amendment of the Ordinance on Occupational Retirement, Survivors' and Disability Pension Plans (BVV2/OPP2), only companies which are subject to FINMA (the financial market watchdog) oversight are authorised to manage pension fund assets. For independent asset managers whose core business is pension asset management, this is tantamount to a technical debarment.  In Switzerland, asset management is only subject to mandatory oversight with regard to collective investments (i.e. collective investments pooling the assets of any number of individual investors, such as mutual funds). Only foreign collective investment funds have the option of voluntarily submitting to FINMA oversight, and even then with restrictions.

In March, the Federal Council instructed the Federal Department of Finance (FDF) to prepare a proposal for an amendment of the law governing the management of collective investments with a view to aligning it with international practice and ensuring access to the EU market. At the same time, the proposal is to reinforce investor protection while improving the quality of asset management in Switzerland. The consultation draft is expected to be ready by the summer. In that context, FINMA may be granted direct oversight on institutional asset managers. FINMA stresses that that decision lies with the legislative.

Greater transparency in asset management costs

Industry representatives warn that restricting this measure to institutional asset managers alone would result in significantly higher costs. The Federal Social Insurance Office has therefore commissioned a study on asset management costs in the second pillar. The study is expected to be published next week.

According to Mr Rossier, the preliminary findings show that special attention must be paid to financial products with built-in commissions. In funds of funds, alternative investments and structured products, for example, costs are not always reported transparently. These categories of investments account for roughly 5% of the overall volume in the second pillar. However, they generate nearly one third of total asset management costs. A survey of Dutch pension funds published in mid-April by AFM, the Netherlands Authority for Financial Markets, sheds some light on actual costs.  According to this survey, the actual asset management costs of Dutch pension funds are on average two or three times higher than the amounts disclosed in their annual financial statements. AFM maintains that the fees and commissions built in to the financial products of external asset managers are not visible to pension institutions. That makes it difficult for pension institutions to appraise the true performance of the products they invest in. And that is what Mr Rossier is demanding. As he explains, high costs are not per se a bad thing. The cost-effectiveness ratio must be good. The regulatory authorities can require pension institutions to break down costs more clearly. If pension institutions and their banks were to improve cost reporting, it would already be a major step in the right direction.