Reports coming out of Switzerland suggest that the Canton of Zurich will levy an extra 4% on local taxes to pay a 2.6bn Swiss franc (£1.83bn) recovery bill for a scandal-ridden local civil servants' pension fund that is pushing the Canton into posting a record deficit.

As reported in the last edition of Pension Funds Insider, the former Chief Investment Office of the BVK faces a day in court on corruption charges for his part in developing the fund's massive deficit of 3.3bn Swiss Francs.   

Now it appears all of the 1.4 million residents of the Canton of Zurich will pay for the mistakes of the fund. While the fund has denied that corruption allegations had any bearing on its deficit and can point to the misfortune common to all pension funds in the investment markets over recent years, there has been some public criticism of its investment decisions.

The Neue Zürcher Zeitung reported that an extra charge will be slapped onto local tax bills (equivalent to the UK's council tax) to directly fund the recovery plan.

Although financial assistance is yet to be handed out by the Cantonal authorities, politicians decided in September to set aside 2.6bn Swiss francs to bail out the fund.

The Canton of Zurich confirmed on Thursday that setting aside the recovery money has single-handedly set in on course towards posting a record government deficit this year.

If BVK hadn't drained public finances the Canton says it would instead be turning over a healthy 300 to 600 million franc (£210m - £420m) surplus for 2011.

A spokesperson for the Canton of Zurich's finance department confirmed to Pension Funds Insider that four percentage points of a total 7% tax rise will be set aside for the BVK pension fund from 2014. For the next two years the associated premium would be just two percentage points though, he added.

Roger Keller pointed out also that the Cantonal tax rise would be offset by changes to personal allowances. The net result being that a family earning 80,000 Swiss francs net would pay just 66 francs more per year for the total 7% tax rise, making the cost of the pension fund bailout "hardly really noticeable."

Given the current public fears across the world, Keller was keen also to state that the Canton of Zurich has "been able to significantly reduce its debt in recent years and is rated well by all rating agencies (AAA)". 

dbillingham@wilmington.co.uk