A] Prelude*
* For more information about Swiss pension plans and pension systems in general, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/swiss-expat-pensions
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
Industry representatives have slammed new analysis claiming higher costs incurred by Swiss Pensionskassen just a month-and-a-half before a referendum on occupational pensions reform. Discussions erupted after Rudolf Strahm, an economist, former politician and former cost supervisor, presented upwards-revised figures for administrative and asset management costs of Swiss pension funds.
B] The numbers
According to Strahm, CHF8.6bn (€9.2bn), or an average of CHF1,500 per year and per member, go to finance costs of pension funds. This is CHF1.5bn more than previously calculated by the Federal Statistical Office (FSO). The difference between Strahm’s figures and those of the FSO comes down to the amount of reinsurance or guarantees that private insurers provide for pension funds, which must be disclosed to FINMA, the financial market supervisory authority, Strahm said.
Strahm has disclosed these numbers, while the FSO has not.
Disclosing guaranteed benefits leads to total asset management costs – making up 80% of total costs – of CHF6.88bn for the Pensionskassen, according to Strahm’s figures, compared with CHF6.1bn calculated by the FSO.
“Rudolf Strahm is stuck in the past when he accuses pension funds of a lack of cost transparency”, AMAS says, the Swiss asset management association. The asset management costs of CHF6.88bn were “an incredibly high sum,” Strahm said, adding that this “private investment business” for pension fund assets was “non-transparent”.
Alternative investments such as hedge funds, used by pension funds, now account for a third of all asset management costs, according to Strahm.
C] Industry reply
Strahm’s intervention met with a firm response from the Swiss occupational pensions industry and pension experts.
Pension funds association ASIP has accused Strahm of causing “alarmism” in the media, citing his description of pension funds as a “self-service shop for banks and hedge funds”. ASIP rejected the accusations about a lack of transparency, saying the Federal Audit Office had said there was transparency and that the occupational pensions regulator had also testified to this. ASIP is against expanding “legal control” on costs that would only lead to more bureaucracy for pension schemes.
Francesca Pitsch, head of the team working on Swisscanto’s respected annual pension fund study, said that focusing on absolute costs was simplistic. Asset management costs may seem high, but were a small sum, considering that total assets in the second pillar amount to around CHF1.1trn. Net returns, after deducting the costs, were the crucial figures for members. “An investment strategy that only focuses on cost reduction comes at the expense of diversification and leads to missed opportunities for returns. More expensive asset classes such as real estate or alternative investments can be worthwhile for the members.”
In the view of the asset management association, AMAS, Strahm fails to understand that costs and performance should go hand-in-hand. “Rudolf Strahm is stuck in the past when he accuses pension funds of a lack of cost transparency. In fact, various measures over the last 10 years have led to cost transparency of almost 100%”.
Mia Mendez, CEO of the pension fund for the employees and partners of PwC Switzerland, said that the “blanket denigration (of the second pillar) is just mortifying, but unfortunately media-effective”.
D] Pension Industry Image
Nico Fiore, CEO at Inter-pension, the organization representing the interests of Swiss multi-employer pension schemes, noted that cost transparency was coming up frequently as a topic and that this suggested it might be part of a campaign for the vote on the second pillar reform in September. “Regardless of whether this vote goes through or not, such negative campaigning can cause lasting damage to the image of the industry”.
Fiore thinks that current calls for transparency — whether at parliamentary level or in the media – are unfounded, because annual reports already disclose costs and pension funds are already obliged to provide members with information on request. “It is really important that the three pillars on which our pension system is based are not played off against each other. Pension funds deserve a better reputation for the work they do for the Swiss society.”
E] Finally
In a number of countries, like for example The UK and The Netherlands, we see that there is also an increasing focus on stating and comparing costs and final pay-out results.
We hope that the industry has learned that in the end it is vital to provide a clear, correct, brief and readable communication towards the participants. Hopefully the industry does not try to make it ‘complete’, as all legal, tax and actuarial details would not be understandable for most participants.