In the spotlight: occupational pensions
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The idea of making financial provision for the future has a long tradition in this country. Over 100 years ago various public law institutions set up schemes to provide financial security for widows and orphans. In the 1960s and 1970s many private companies established their own pension funds or joined a collective scheme. When, at the beginning of the 1980s, the Federal Council and parliament decided to make employee benefits and pensions mandatory, a network of pension institutions was already established across the country.
Occupational pensions and employee benefits are regulated by a series of laws and ordinances. The basic rules are set out in Article 331a to 331f of the Swiss Code of Obligations (CO). For example, these rules stipulate that contributions to an employee benefits scheme may not be credited to the company affiliated to the fund, but must be transferred to an independent third party, such as a foundation, a cooperative or a public law institution.
The Swiss Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans (BVG/LPP) of 25 June 1982 and the Ordinance on Occupational Retirement, Survivors’ and Disability Pension Plans (BVV 2/OPP 2) constitute the most important legal foundation for the second pillar of the Swiss pension system. Among other things the legislation regulates the statutory duties of employees, the obligations of employers, and the organisation of employee benefits schemes.
Under the terms of the law and the ordinance, contributions to an employee benefits scheme are mandatory for employees with an annual salary of between CHF 21,150 and 84,600 who exceeded age 17 but have not yet reached retirement age. Up to age 24 only the risks of disability and death have to be covered. After that the savings process begins. Employees are not free to join any pension fund of their choosing, but are tied to their employer’s scheme. The law on vesting of 17 December 1993 and the accompanying ordinance of 3 October 1994 are designed to prevent this obligation from putting ‘golden handcuffs’ on employees. You can read more about this in see Swiss pensions system.
In return for the obligation imposed on employees, BVG and BVV 2 impose a duty of care on employers, who have to either join a benefits scheme on the official register or establish their own. The social security authority checks whether employers have met the obligation to join a scheme. If they have not, the authority notifies the Substitute Occupational Benefit Institution accordingly.
The BVG is designed to give employers and employees an equal say in the management of benefits schemes, with each group entitled to an equal number of representatives on the pension fund board. The board’s duties are set down in Art. 51a para 1 BVG. The governing body of the employee benefits scheme is responsible for the overall direction of the scheme, ensuring that the relevant legal requirements are met, and determining the strategic objectives and principles of the scheme and the means used to implement them. The governing body also determines the way the scheme is organised, assures its financial stability, and monitors its management.
In practice, trustees and the other management bodies of benefits schemes generally make full use of this room for manoeuvre. The governing body is also responsible for internal control. Each pension fund decides for itself how this control function is to be performed. Naturally it has to be adequate for the risks. But here too, pension fund boards have extensive leeway.
According to Article 35 para 1 BVV 2, the auditors must check whether internal controls are in place and are appropriate to the size and complexity of the scheme. There is no legal requirement for benefits schemes to set up a system of internal controls. While large pension funds have set up such systems on their own initiative and linked them with their risk management systems, many small and medium sized funds have some catching up to do. A system of internal controls is particularly important in terms of corporate governance. For many insured persons, the retirement savings accrued in their pension fund represent the lion’s share of their personal wealth.
Art 52a BVG specifies two external bodies responsible for scrutinising benefits schemes: the pension fund expert, and the auditor. They have equivalent status but perform different roles. Art. 52e BVG specifies the duties of pension fund experts and Art. 52c BVG sets down those of the auditors.
The pension fund expert serves as an actuary, periodically checking whether a scheme can be sure of meeting its obligations at all times. The pension fund expert also checks whether the technical rules governing benefits and funding are in compliance with the law. They make recommendations regarding the technical interest rate and other technical parameters to the pension fund board. If a scheme is underfunded they will recommend the corresponding measures.
The auditor is the second external oversight body. Under the terms of the BVG auditors have a broader remit than statutory auditors under company law. In addition to auditing the financial statements, auditors specialised in employee benefits check whether the statements are compliant with the rules of the pension fund. Among other things they look to see whether the fund’s organisation, management and investments satisfy the requirements of the regulations and the law. When it comes to pension obligations and technical reserves, the auditors work on the basis of the report of the pension fund expert, checking to see whether the expert’s calculations are plausible, and in particular whether the data used for calculations are complete and whether the terms of the regulations have been complied with.
Benefits schemes are also subject to the oversight of cantonal authorities and the Supervisory Commission for Occupational Pensions (OAK BV). This dual oversight structure was introduced in 2011 as part of structural reforms of the BVG system. For reasons of cost and efficiency, some cantons have joined forces to allow oversight on a regional basis. The cantonal and regional oversight structures are set up as public law institutions with their own legal personality, and are not subject to outside direction.
The cantonal and regional oversight authorities check whether benefits schemes are in compliance with their bylaws and the law. They also check the regulations of each individual institution under their oversight and inspect their annual reports and the reports of the pension fund experts and auditors.
The OAK BV is the independent commission presiding over the cantonal oversight authorities. Its main role is to assure quality and legal certainty. It is responsible for ensuring consistent supervisory practice. To this end it can issue directives and carry out inspections.
This dual oversight of benefits schemes is the exception. In other industries such as banking, insurance and at first pillar level there is only one central authority. The advantage of this two-tier structure is that each supervisory authority knows the schemes it oversees well and can address their circumstances on an individual basis.
The Swiss system of pension fund supervision has proven its worth. The pyramid oversight structure, from internal control to the supreme federal oversight body, makes sense and serves its purpose. In the past there have only been isolated glitches, which in most cases were due to criminal behaviour.
Employee benefits and pensions face major challenges, most of all because of increasing longevity and low interest rates. The resulting issues cannot be addressed with more laws and government oversight. The problems can only be tackled by the bodies responsible for benefits schemes and the social partners involved. To do this, they need sufficient room for manoeuvre.