ZURICH - Many Swiss companies and local governments are switching to defined contribution plans, abandoning the traditional defined benefit system.
A combination of factors prompts the switch: greater employee understanding of benefits in defined contribution plans; changes in work force patterns, a desire to maintain greater cost control; and new legislation affecting vesting and portability rights and withdrawal of assets for home purchase.
While not universal, the number of Swiss companies and governments making the switch is impressive.
Asea Brown Boveri Ltd., the Swiss and Swedish engineering giant with headquarters in Baden, converted its 3 billion Swiss franc ($2.26 billion) defined benefit plan to a defined contribution plan earlier this year.
Other Swiss companies believed to be in the process of switching or considering such a move include CIBA-Geigy Ltd., the Basle-based chemical and pharmaceutical firm; Sulzer AG, Winterthur, a machinery manufacturer; and Zellweger Uster AG, Uster, a maker of specialized electronic systems and other machinery.
Public pension funds also are jumping on the trend. While the Canton of Lucerne was a leader in switching four years ago, other bodies changing include the cantons of Zurich, Zug, Uri, St. Gallen, Schasshausen, Schwys, Solothurn and Thurgau, as well as the city of Zurich pension fund, pension officials and sources said.
With some $210 billion in assets, the Swiss pension market is the sixth-largest in the world. Swiss plans already are very conservative investors. They have doubled their allocation to equities in the past five years, but only to 10% to 15% - a far cry from the 53% average level in the United States or 82% average allocation in the United Kingdom.
But a switch to defined contribution plans is not having an immediate effect on how Swiss plans are invested - though some experts believe it will place more pressure on companies to invest for higher returns, since workers will be watching their accounts closely.
"It will make it much easier for people to judge us," said Christoph Oeschger, who oversees ABB's pension investments. Traditionally, Swiss firms have paid little attention to how their bank managers have fared; performance measurement is a new concept in the Swiss market.
Swiss pension experts said a defined contribution plan is more flexible and easier to understand than the traditional defined benefit plan.
It's far easier to show participants the value of their benefits, said Daniel Gloor, head of asset management for the Canton of Zurich, whose 10.6 billion franc fund will convert in January 1996.
In addition, participants directly benefit from investment gains, said Rinato Merz, who oversees ABB's retirement plans. In Swiss defined benefit plans, surplus returns often are buried in hidden reserves. Real estate and equities often are reflected at book value, while bonds at held at nominal value. Employees typically share in such reserves only if benefits are increased or there is a shortfall.
"We will have in the future a strong interest from employees. If we do a good job, they will benefit directly," Mr. Merz said.
In fact, ABB is exploring the idea of permitting senior managers to direct investments of their own accounts - which would be unprecedented in Switzerland.
Under Swiss law, the mandatory minimum pension benefit - known as the BVG - must return 4% a year, so it would be foolhardy to give employees discretion over those assets. Employees likely would take the most aggressive approach, while the company would be at risk for any returns below 4%, Mr. Oeschger explained.
ABB is pondering giving investment discretion to employees whose benefits exceed the minimum level, though the proposal needs the approval of the company's board of trustees and regulatory authorities. Such a change could go into effect by early 1996, Mr. Oeschger said.
One actuary, though, questioned whether Swiss authorities will approve the proposal, because the plan then might become more an individual vehicle than a collective retirement plan.
Swiss pension experts also said the increasingly mobile work force also benefits from defined contribution plans.
It's far easier to provide pension coverage for the growing number of part-time workers in a defined contribution plan, explained Arnin Braun, director of the City of Zurich's 6 billion franc pension plan, which will convert to a defined contribution plan Jan. 1.
"A ticking time bomb"
Cost control also is critical for many Swiss companies and cantons - an issue made prominent by the recent recession and high interest rates, noted Dominique Ammand, a partner with Pension Portfolio Consulting AG, Zurich.
In times of high inflation, defined benefit plans expose employers to substantial liabilities, since benefits are based on an average of each employee's final pay. Those liabilities represent "a ticking time bomb," said Markus Nievergelt, a director of Prevista Vorsorge AG, a Zurich-based actuarial firm.
In fact, Bruno Almenzinger, Sulzer's vice president, treasurer and controller, said the main reason for the company's planned switch to a defined contribution plan is to avoid problems inherent with high inflation. The 2 billion franc defined benefit plan will be converted Jan. 1.
In times of high inflation, Swiss companies now face the dilemma of raising contributions - which are borne by both employers and employees - not providing inflation adjustments, or even lowering benefit formulas, experts said.
For the cantons, it's worse, because they must provide full inflation adjustments to retirees.
New vesting rules
New federal laws also encourage the shift to defined contribution plans. While the BVG portion of the pension benefit has been immediately vested since it was introduced in 1985, it took until last year for the Swiss legislature to expand that requirement to the bulk of retirement benefits.
Starting Jan. 1, 1995, previously forfeited benefits - monies that would have been used to help pay older workers' benefits - will have to be paid out to workers when they leave employment.
Plus, a new portability provision also increases employer costs. An employee who quits his job will be able to withdraw the present value of his pension benefit and purchase equivalent benefits from his new employer.
But the employee's accrued benefit will be based on his current salary. If he buys into a traditional pension plan, which sets benefits on an average of final pay, that means the new employer eventually will absorb a huge past-service liability as the employee's salary rises.
The employer "is picking up a major cost of the early years" of pension coverage, explained Mike McShee, managing director of The Wyatt Co.'s Geneva office.
With a defined contribution plan, the new employee simply deposits his benefit distribution into the plan, avoiding the risk for the employer.
Swiss companies have estimated the new law will increase pension costs by 1% to 2% of wages, but the administrative burdens are perhaps more daunting. "It's nearly impossible" to run our system under the new federal laws, said the City of Zurich's Mr. Braun.
Home ownership law
Also exacerbating the trend is a second new law designed to encourage home ownership.
In a country where the most basic home can cost at least $500,000 and only 30% of the population own their own homes or apartments, Swiss legislators adopted the rationale that home ownership could be considered as part of the retirement holdings. Prevailing high interest rates in the early '90s also influenced the adoption of legislation.
Starting Jan. 1, plan participants under age 50 will be able to withdraw the entire amount of their accrued benefits for purchase of a home. Some limits affect the amount of withdrawals for workers older than 50.
The law also permits employees to borrow against their accounts for home purchase at a favorable interest rate.
No one is sure how large the impact of this legal change will be. Mr. Ammand thinks 5% to 15% of pension assets could be withdrawn; others believe the amount will be minimal.
For one thing, experts say benefits accrued in the early years don't add up to much. For another, distributions are immediately taxable, though at rates set by each canton, ranging from zero to 16%. Where the employee lives can determine whether withdrawal is tax-efficient.
Administrative problems abound for employers. For example, how a defined benefit plan calculates future benefits for an individual who has withdrawn his money is one of the murky issues left unresolved by the law, Mr. Nievergelt said. With a defined contribution plan, no such problem exists.
But the home ownership rules, on top of the vesting rules, clearly provide incentive to establish individual accounts for participants - which only are available in defined contribution plans.
Still, some experts argue that the new laws merely provided an excuse for employers, who sought to rein in their pension costs.
"The law was something (of) a Trojan horse," said Felix Kottmann, a consultant with Complementa AG, St. Gallen.
In addition, employers were leery of defined benefit plans because Swiss pension funds must have equal representation of employers and workers on their boards, he said. With an underfunded pension plan, "you can't go to the work force and tell them to increase the contribution," Mr. Kottmann said. Employees and employers tend to make equal contributions in Switzerland.
Wyatt's Mr. McShee agreed the legal changes by themselves were not enough to cause a wholesale change to defined contribution plans. The vesting rules, which are the more important of the two, he said, "are not going to cause a headlong dash to convert."