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Governance and risk management in the interests of insured members for Swiss pension funds

360°Benefits I News

By Christian Heiniger and Michael Melles | June 22, 2023

The growing importance of strategy and better management (governance).

The growing importance of strategy and better management (governance)

Governance has played an increasingly important role for Swiss pension funds since the 2011 structural reform. It is therefore also a central element of our 360° vision of pension benefits. When it was introduced, Article 51a of the BVG/LPP elevated the Board of Trustees (“Foundation Board”) to the status of a de facto Board of Directors, insofar as it is responsible for defining and monitoring strategic objectives and principles.

The BVG expert and the Foundation Board are required to assess and manage risks

The guiding principle is to safeguard the interests of insured members by providing secured pension provision and an adequate level of benefits, while complying with the fiduciary duty of care.

Our experience shows that Internal control systems (ICS) are often used as pure control tools rather than as risk management tools, even though they are supposed to cover and control all the key aspects of pension benefits (see Fig. 1). From the BVG experts' point of view, it is recommended that the areas of financing, investments, and pension liabilities be assessed from a risk perspective and made available to the Foundation Board for stronger risk management purposes.

It is therefore important to be clear about how and how often risks are measured, and when adjustments to pension benefits and tactical or strategic interventions by the Foundation Board are necessary.

Extending the ICS to cover regulatory and legal risks

The essential prerequisite for better governance and hence for proper risk management is the implementation of the key principles of independence (art. 40 BVV 2), transparency (art. 48b to 48e BVV 2), integrity and loyalty (art. 48f to 48l BVV 2) of all those responsible. In addition, regulatory and legal risks should be regularly reviewed within the ICS process and be adapted or extended.

A recent example is the complete revision of the Data Protection Act (DPA) and the Data Protection Ordinance (DPO), which will come into force on 01.09.2023. See our recent 350°Benefits I News - Overview legislative developments and law reforms in the 2nd pillar from 2023 onwards.

Actuarial expertise as a control tool and a component of risk management

The funding assessment is the responsibility of the BVG expert and is generally subject to an annual audit. In this context, it is essential that the actuarial report includes an analysis of the gains and losses items on the balance sheet, providing information on the structural sources impacting the Foundation's coverage ratio. The expert's recommendations must then be implemented rapidly by the Board of Trustees, to avoid any funding imbalances between the jointly insured communities. Structural imbalances can thus be reduced by adjusting parameters (such as conversion rates) or adopting an appropriate annual effective return participation model. Structural imbalances can arise in the case of excessively high conversion rates, which are not adequately funded by the expected return and require additional funding.

The required return required to finance long-term pension benefits can be an appropriate indicator for assessing the funding adequacy of the benefits provided by the plan rules. This required return is provided by the return that the pension fund needs to achieve if the same level of benefits is maintained, and the coverage ratio with a sufficiently built-up fluctuation reserve value is taken as the target. If the expected return on the Foundation's assets (based on a projection model) falls short of the required return, the pension fund's benefits, financing and investment strategy will have to be reviewed and, if necessary, adjusted rapidly.

An ALM study (Asset Liability Management) to define opportunities and risks

The interplay between benefits security and risk distribution on the investment is also addressed in Article 50 BVV 2. It should be noted here that the assessment of the security of achieving the pension fund's objectives must include an assessment of all the assets and liabilities on the balance sheet, as well as the structure and expected demographic development of the insured population. In addition, the pension fund is required to select, manage, and monitor its investments carefully. The legislator therefore implicitly requires the Foundation Board to carry out a periodic ALM study as part of its duty of care, particularly when it comes to defining or adapting an investment strategy.

It should be noted here that only a demographic evolution of the insured members, calculated dynamically in an ALM study, can be used to properly check that the investments are sufficiently matched to risk capacity and the pension benefits over the calculated period.

In this context, the Foundation Board also decides whether risks should be measured from an economic or a statutory point of view, and at what intervals. How are risks and their financing shared within the insured population, and which elements can or should be reinsured? The assessment of the main actuarial and financial market risks should be integrated, along with the chosen method and frequency. This will provide the Foundation Board with a more transparent picture of the pension fund's current situation, and serve as a sound basis for informed decisions.

The diagram shows the main areas of an internal control system: actuarial, investment, legal, management, administration and communication.
Figure 1

Ongoing training for the Foundation Board and exchanges with experts are important elements of governance

An ongoing process of discussion and further training is required with the BVG expert, investment specialists and legal experts to ensure that governance remains efficient, active and implemented as a genuine basis for sound decision-making. It is essential that the factors impacting the pension fund today and tomorrow are clearly explained and assessed (e.g. using modern tools), so that the Foundation Board is always aware of the risks and opportunities and can make the best possible decisions.


Pensionsversicherungs-Experte SKPE

Pension Fund-Expert

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