Pension funds are easy prey
Impressum: Article by Rudolf Strahm, former National Councillor and price watchdog, published online on the Zürcher Tagesanzeiger newspaper website on 18 November 2008, in the Kolumnen und Kommentare section. Translation by B+B Vorsorge AG
The chapter in the global financial crisis that will prove the most expensive for Switzerland is yet to come: the pension fund debacle.
By the end of 2008, Swiss BVG pension institutions are set to post losses of between 80 and 100 billion Swiss francs. Hundreds of pension funds will have to announce a substantial capital shortfall. In coming years, both employees and employers will have to cough up a higher contribution in terms of salary to cover the difference. However, many of these value corrections are simply book losses, as in the case of shares, which should correct themselves in the next few years.
Nevertheless, it is estimated that actual losses in retirement assets amount to tens of billions of Swiss francs. These losses originate primarily from investments in hedge funds and structured products (which already accounted for CHF 40 bn of pension fund assets back at the end of 2007), absolute return funds of the big banks that have suffered large losses, and collateralized debt obligations (CDO), the latter two of which are falsely labelled in terms of their names alone.
Substantial shifts
It is an ironic quirk of fate that, on 19 September 2008 – right in the middle of the financial crisis – the investment guidelines for pension funds were relaxed. In revising the BVV2 Ordinance on Occupational Retirement, Survivors' and Disability Pension Plans (with effect as of 1 January 2009, to be fully implemented by the end of 2010), the Swiss Federal Council has, of all things, increased investments in hedge funds and structured (i.e. speculative) products to 15%, while reducing investments in real estate from 55% to 30% and those in mortgage loans from 75% to 50%. In extreme cases, this means that pension funds must transfer their more secure investments in property or mortgage loans to less secure ones such as shares and structured products – an economic outrage in view of what we have seen during the financial market crisis.
This deregulation will lead to investment types with increased risks, increased speculation and less credit. After all, mortgage loans and capital investments in real estate have for more than a decade proven to be more secure and, in the long term, more profitable than shares or so-called "alternative" investments such as hedge funds.
Back-room decisions
Those set to benefit from the planned shift in investment patterns are the big banks, hedge funds and investment consultancy companies. Swiss Federal President Pascal Couchepin was the person on the Federal Council to formally request a relaxation of the regulations. The parliamentary commissions were neither consulted nor briefed beforehand. The driving force behind the change was the ominously named Ausschuss Anlagefragen (investment matters committee), composed of members of the BVG commission and external representatives of Switzerland’s marketplace.
This eleven-strong committee was responsible for concocting the new investment strategy and literally forcing it through the BVG commission. If you now question members of the commission who are not in the committee, they all claim to have had a “bad feeling” about the entire matter and to have sensed that those involved were “out of their depth”.
The Ausschuss Anlagefragen was dominated by the financial community, consisting of five representatives from banks and insurance companies (UBS, Pictet, Credit Suisse, Swiss Re, Axa Winterthur) and two representatives from investment consultancy companies (PPCmetrics, KPMG). Representatives of the Swiss government (two) and of social partners (one of each) were in the minority.
The committee was headed by Dominique Ammann from investment consultancy PPCmetrics, which has a hand in the pension fund business. Ammann and his company will profit directly from the new investment guidelines, as the changes in the investment mix and the transfer of increased responsibility to governing bodies of pension funds will, from the point of view of independent experts, entail a huge increase in the need for external consultancy services.
Banks and consultancy firms will profit
This is exactly what Ammann’s consultancy company is taking advantage of: PPCmetrics states the following in large type on its French and German websites under the heading of “Revised BVV2 investment guidelines”: “PPCmetrics will help you comply with the new BVV2 investment guidelines”. What it fails to mention is that pension fund consultancy services of this type cost CHF 400 per hour. PPCmetrics aside, consultants are not obliged to declare the commissions and kickbacks they are granted by banks.
Following this deregulation coup, what can be done? The National Council commission for social security and health (SGK-N), which only recently acknowledged this done deal, requested a report from the Federal Council at the beginning of November. The Council of States commission will soon have a similar opportunity. The strategy should be as follows: to not implement the revised BVV2 ordinance on 1 January 2009, to get Parliament involved, to carry out a broad consultation and then, if necessary, a broad-based revision.
Our 600 billion Swiss francs in pension fund assets have been scraped together through forced savings implemented by law. It is therefore a public obligation to set limitations for the pension funds with their joint and often unprofessional, rigid boards of trustees by enforcing a conservative investment strategy. Pension fund assets are the longest-term investment of all – meaning they are not compatible with structured and speculative products, unsecured investments in US dollars, and actively managed investment funds. No one except the banks and investment consultants profits from this.
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