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October 04, 1999 01:00 AM

FURTHER AFIELD: MORE AUTONOMY; SWISS PROPOSAL WILL ALLOW PENSION FUNDS TO BREAK THROUGH INVESTMENT CAP CEILINGS

Beatrix Payne
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    BERN, Switzerland -- Demand from Swiss pension funds for private equity investment vehicles, hedge funds and mutual funds is likely to pick up, now that Switzerland's financial regulators have conceded to local industry demands for revising restrictions on domestic and international investments by pension funds.

    Under the proposed revisions to the current investment guidelines, Switzerland's 435 billion Swiss franc ($283 billion) pension industry will be free to invest in international mutual funds, even those that are not publicly traded.

    More freedom

    Pension funds also will be able to break existing investment limits for all asset classes without seeking regulatory approval, so long as they have conducted an asset-liability study.

    The revised investment regulations are likely to come into effect early next year, said Werner Nussbaum, a member of the BVG Commission, the Swiss Federal Government's advisory board on the domestic pension system.

    The revisions will indirectly give trustees greater autonomy to chose asset allocations and will encourage them to look at a pension fund's risk/return profile as a whole, rather than focusing on risk in individual asset classes.

    "Investment managers will have to be more prudent and sophisticated with respect to the liabilities of the pension fund," said Mr. Nussbaum.

    Greater clarity

    The move will also clarify BVG investment guidelines, the wording of which many find opaque. For example, the current regulations on investment in international mutual funds are unclear and few pension funds are willing to take the legal risk of misinterpreting the law when investing in them. This puts foreign mutual fund marketers at a disadvantage in the domestic market, said Michael McShee, managing director Buck Consultants, Geneva, Switzerland.

    Local money managers and pension funds have welcomed the BVG's attempt to move toward a "prudent-man" approach to pension fund management and give trustees greater license in making investment allocation decisions. But some say the authorities have not gone far enough and should scrap quantitative limits on investment altogether.

    Unwelcome barriers

    Existing regulations are conservative and make it difficult for fund trustees and managers to manage the assets properly, said Reto Kuhn, managing director for the 3.5 billion Swiss franc Pensionskasse des Fligenden Personals der SAirgroup, Zurich.

    Swiss pension funds currently face a long list of investment restrictions such as 20% and 25% ceilings on investments in foreign bonds and equities, respectively, and a 30% limit on investment in domestic equity.

    But a fund may exceed these limits if the trustees think it is in the fund's best financial interests and permission has been granted by local regulators.

    Defining exactly what is in the best financial interests of a particular fund is a rather gray area in the current regulations, however, and pension fund managers are concerned that this lack of definition could give rise to disputes between plan members and plan trustees.

    Under the new regulations a pension fund will only need to show that the decision to break the regulatory limits is based on an approved asset-liability study, said Mr. Nussbaum.

    Pensionskasse des fligenden Personals der SAirgroup has for some years broken the investment limits on the basis of its being for the good of the fund. "We do what we think is correct for the fund in a financial sense," said Mr. Kuhn.

    But the proposed regulatory revisions will put the fund in a stronger position to justify its decision to overshoot the investment guidelines. Seven percent of the fund's assets has been earmarked for private equity investments. But so far it has been able to invest only in direct partnerships and holding companies, which currently account for 5.6% of its assets.

    "According to the current rules, we would not be allowed to invest in private equity, as it is not listed and is not based in Switzerland," said Mr. Kuhn.

    Hansjorg Herzog, managing director-advisory and global custody for Credit Suisse Asset Management, Zurich, expects to see interest improve in alternative investments such as hedge funds or private equity. "But it will be some time before Swiss funds invest in sizable proportions. There is only a small minority of funds that invests in alternative investments," he said.

    The most significant change in the market will occur when medium-sized and smaller pension funds realize they are free to make their own asset allocation decisions for the fund.

    More than half of the country's 4,500 funds have fewer than 100 members, invest nowhere near the current limits and take very conservative approaches to asset allocation. Most use banks to manage assets, and foreign money managers and mutual fund groups may have a tough time cracking this market, said Mr. Herzog.

    A wide-spread change in attitude will be needed among the trustees of mid-sized and small funds before international money managers and their offerings gain acceptance in the Swiss market, said Heinz Rotacher, director of Mercury Asset Management Ltd., Zurich.

    Non-Swiss money managers such as MAM are already marketing their products in Switzerland. Others include Fidelity Investments, Boston; Fleming Asset Management Ltd., London.

    Peter Flynn, London-based head of institutional marketing for Flemings welcomed the changes to the Swiss investment rules and said the money manager planned to increase its resources in Switzerland.

    "If this change pushes the Swiss market towards more appropriate investment products, it is a good thing," he said.

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