Despite being the 45th biggest pension fund in Europe, a wave of mismanagement and a corruption scandal has exposed an overall deficit of 15bn Swiss Francs at the BVK fund, according to a leading academic

The Swiss Tagesanzeiger newspaper recently reported on a series of apparent investment errors that led to the BVK fund adding 300m Francs to its deficit in 2010. The burning hole on the balance sheet has now become a political issue with fears emerging that taxpayers may have to step in to stem the crisis at the civil servant's fund.

Most notably, an optimistic decision of the fund to commit itself to achieving a 4% annual return for each member when it has only achieved a 2% average annual yield since 2004, has been described in some quarters as naive. The target means, according to Zurich University Professor of Finance Martin Janssen, that the fund should be holding a surplus of 20% to fund future obligations, when it is currently 14% underfunded.

Janssen has therefore asserted that the official deficit of 3.3bn Swiss Francs masks a 'real deficit' of 15bn Francs. Janssen recently told the press that the fund's investment strategy "did not systematically follow the rules of the book."

These other alleged errors include BVK being slow to adjust to the greater longevity of its retired members, forcing the fund to use 46% of its assets for paying pensions last year, a rise from 40% in 2010. Swiss pension experts have also criticised the fund for failing to hedge foreign currency risk on many of its holdings, particularly with its 4% real estate investments overseas which yielded in local currencies. BVK has also struggled to make a good return on the 3% of its assets invested in hedge funds.

The latest bad headlines for Zurich-based BVK come just months after its then head of asset allocation, Daniel Gloor, was arrested and charged with taking 1.5m Swiss Francs in bribes for improperly award mandates. Ever since the arrest the affair has gripped the Swiss business pages as they seek to unravel a possible fraudulent network.

BVK insisted in a statement that "the deficit bears no connection with the bribery scandal," although the fund has since decided to retender some of its mandates and review its ties to consultants Complementa and a small investment company called DL Investment Partners. This was founded by former Complementa employees, and was in charge of the criticised hedge fund mandate, allegedly because it made an illegal payment to gain it.

For their part, Complementa deny any suggestion that they improperly influenced the selection of DL Investment Partners, with CEO Michael Brandenberger telling Pension Funds Insider: "We firmly believe that there was no improper behaviour from Complementa's side concerning the BVK mandate. Complementa was also not involved in the selection of DL Partners as a provider for BVK as we did not and still don't have any relationship to DL Partners."

DL Partners also responded to the allegations by saying: "For any award of client mandates, DL Investment Partners adheres to the law and regulatory frameworks".

The Zurich-based national daily Tagesanzeiger also reported that BVK trustees had been disagreeing on investment strategy back in 2007, with an unnamed employee representative reportedly raising major concerns that risk was not being properly managed. Months after Gloor was arrested, a new risk manager was appointed at BVK after intervention by the regional government.

Political affair    

The clearing up of the fund's messy finances now threatens to turn into a political row. As a fund for civil servants in Zurich and the surrounding canton, the regional government is named as the funds' sponsor in their annual report. "BVK are likely to cost Zurich taxpayers billions," is Janssen's frank assessment.

BVK has also been accused of pandering to the Zurich canton government by claiming they can sort out their own deficit worries in the publication of a consultation report on their recovery. Some have suggested that this stance benefited the incumbent government ahead of regional elections on 3 April.

Ingrid Hieronymi, who represents BVK members in the district of Langnau am Albis says: "We rejected the proposed BVK recovery plan as we are of the opinion that the canton should step in. Obviously they don't want to put the whole truth out on the table before the elections."

BVK has blamed the deficit largely on its failure to match the 4% annual return target, stating "as yields over the past ten years have effectively been 0.65% per year below the target, this has eaten its way into the asset sheet."

The fund also appeared to blame a host of historical measures for its current predicament, saying "the reduced asset sheet is also due to having to finance abnormal benefits. Amongst the most important of which are the financing of living allowances on current pensions since 1995, the reduction in employee contributions between 1998 and 2001, the prime adjustment costs in 2000, the high interest rate on savings in 2000 along with the financing to mitigate the reduction in the yield rate in 2002."

BVK defended criticism of its currency hedging strategy by stating: "in 2010 funds that did not fully hedge their foreign currency exposure could only partially convert their foreign currency into returns. In years with less turbulence this tactic will bring greater returns than those at funds who have fully hedged their risk."

They added that "the investment view of pension funds is very long-term and individual annual results are not fit to judge investment strategies on." 

BVK's new head asset manager Adrian Wipf, told Pension Funds Insider that after carrying out a thorough consultation and "according to its blueprint" the deficit should be eliminated within ten years at the most. "As performance predictions are always tainted by uncertainty, the consultation plan envisages a flexible recovery deficit," he said.

Wipf added that putting BVK back on its feet should not be a matter for the Zurich regional government as "in Switzerland occupational pensions are managed by the social partners" of trade unions and employers.

dbillingham@wilmington.co.uk

First published 06.04.2011