ZURICH, Switzerland -- Swiss regulators will consider relaxing investment rules, shifting toward a broader principle that considers the riskiness of an investment within the parameters of the total pension fund portfolio.
That rule change, which is expected to be considered by the Swiss Federal BVG Commission this autumn, could result in greater investments in private equities by Swiss pension funds. If approved, the proposals would go to the Swiss legislature for adoption.
Swiss officials, however, are not expected to eliminate their layered system of maximum investments in different asset classes at this time.
In addition, the Swiss BVG Commission, which reviews pension regulation, will consider clarifying that Swiss pension funds can invest in foreign-based mutual funds. One Swiss money manager claims this would give non-Swiss pooled funds an advantage over domestic funds because of tax and regulatory issues.
Swiss pension experts said liberalizing the investment rules would dispel a cloud over investing in riskier asset classes.
"It's the reason most of the pension funds do not investment in private equity," said Hansjorg Herzog, managing director, institutional clients, at Credit Suisse Asset Management, Zurich, and a technical adviser to the BVG Commission's asset management committee, which has developed the proposals.
Under current law, Swiss funds must look to "safety first" in selecting investments and may choose only very secure investments, generally lacking credit risk, he said.
The BVG asset management committee now is moving toward a modern portfolio theory approach that would assess the risk tolerance for the entire pension fund portfolio, and would ensure adequate diversification.
U.S. pension officials, under the more liberal prudent-man rule, made a similar ruling in 1979 under then-Administrator Ian Lanoff, that opened up the field to riskier asset classes.
There is internal pressure, however, to ensure Swiss funds not be allowed to invest in hedge funds or commodities, take on leverage or adopt net short positions.
The panel also is considering making it easier for pension funds to deviate from the maximum investment limits now contained in the pension law. The limits provide a series of overlapping caps, providing a certain degree of flexibility to pension funds.
For example, under Swiss law, pension funds can invest up to 50% of total assets in equities, with individual asset classes set capped at 30% in Swiss equities and 25% in international equities. Similarly, the law contains a cap of 70% of assets in combined equities and real estate, with a 5% cap on foreign real estate and a 50% limit on Swiss real estate. In practice, however, many large Swiss pension funds exceed those limits. Pension officials are not required to seek permission from cantonal authorities to breach the limits, but they must have their external auditor certify in the fund's annual report that the fund is not taking on too much risk.
While the exceptions rule exists, in reality most funds "hate to use it," Mr. Herzog said.
Added Mike McShee, managing director for Buck Consultants, Geneva: "At the moment, the average mentality is that the published limits" can't be exceeded.
Mr. Herzog said the exceptions rule would be renamed "the enlargement of investment policies," and pension funds would be encouraged to use this rule.
Pension funds would have to explain their policies at least once a year in their annual report, he said.
The third change would clarify that Swiss pension funds could invest in foreign-based mutual funds, such as SICAVs.
At present, the rules say Swiss-based mutual funds fit under the maximum investment caps for each asset category.
But foreign-based funds can be used only if they are publicly traded, Mr. McShee said. Many pooled funds are not publicly traded, although they can be used in special circumstances, he added. "But again, people don't always like to do that," he said.
The BVG asset management committee proposal would change the murkiness of the law, Mr. Herzog said.
But Gerard Fischer, chief executive officer of Vontobel Fonds Services AG, Zurich, said the proposal would hurt Swiss-based pooled fund managers.
"It's a very stupid move because if you asked if I could start selling Swiss investment funds outside Switzerland, the answer is no," he said.
Meanwhile, foreign-based managers would avoid Swiss banking regulation. What's more, the foreign fund would not have to pay the value-added tax of 7.5% to an intermediary, although Swiss funds have to pay the tax, Mr. Fischer said.
The result is that Swiss managers might have to relocate their institutional funds businesses to Luxembourg, he said.
