At present, around 190,000 companies, 1.94 million or 37% of employees in Switzerland are affected by short-time work. The economic crisis associated with the COVID-19 pandemic also directly and immediately affects the pension funds of the companies concerned in both their capacity as investors and as providers of employee benefits to their sponsoring employer. Even companies that are not heavily affected by the crisis may find their pension fund under stress.
It is therefore advisable to include pension fund issues when planning the steps to be decided at company level.
Impact on the sponsoring company should drive the pension response
Below we consider three typical scenarios on how the negative financial impact of the COVID-19 pandemic may impact companies:
- Small to medium impact: a painful but manageable loss in revenue with some short term measures needed, such as short-time work;
- Large impact: a big loss in revenue threatening the company’s long-term plans and requiring restructuring;
- Extreme impact: a serious loss in revenue that may lead to plant or business unit closure or bankruptcy.
Each of these scenarios poses different challenges for pension funds. Some companies may find themselves moving through all three scenarios in the coming months.
Below, we outline recommendations and considerations for each of the three scenarios for pensions.
Scenario 1: Manageable loss in revenue but short-time work is being used
Challenge
Measures must be planned to ensure the long-term continued existence of the company and, if necessary, the pension fund.
Our recommendations / considerations
- The challenges facing pension funds, the benefits they offer and our recommendations were covered in our separate blog Swiss pensions and COVID-19: funds are affected, but can also help employers.
- If due to COVID-19 short-time work has been introduced and a welfare fund with voluntary discretionary benefits is in place there may be opportunities to use this fund to finance the salary difference. Any employer in this position should review the recent report by the OAK BV (Oberaufsichtskommission Berufliche Vorsorge).
- It should also be noted that the salary insured in the pension fund is generally unaffected despite short-time working, so that the pension fund contributions both by the company and by the employees continue to be paid at the same level.
Scenario 2: Restructuring including redundancies are needed
Challenge
To ensure the continued existence of the company, redundancies and/or the sale of a part of the company are necessary. The measures to be adopted must be as mild as possible and have the greatest possible effect.
Our recommendations / considerations
- Dismissals can lead to a so-called partial liquidation at pension fund level. It should be examined whether the relevant regulatory provisions need to be adjusted in view of the imminent partial liquidation. This can be complex, and needs to be analysed and planned for in the process.
- If necessary, a reassessment of the value of directly held properties of the pension fund should be examined.
- In addition to various legal and actuarial challenges in connection with a partial liquidation, it is also necessary to ensure the liquidity required for the transfer of the insured persons' pension assets.
- Finally, in order to ease the burden on the employer, changes in pension plan rules (i.e. funding and/or level of benefits) may be considered, perhaps temporarily. The pension fund with equal representation of employer and employees has to decide on this.
Scenario 3: Business closure or bankruptcy threatens
Challenge
Under great financial and time pressure, numerous options have to be considered and far-reaching decisions have to be made.
Our recommendations / considerations
- To ensure the necessary liquidity on a short-term basis, there may be an incentive to withhold due social security contributions (AHV and PF), for example to pay outstanding wages. This is risky under liability law considerations and any loss of contributions may lead to liability claims against the company's board of directors or the responsible pension fund body. The Ordinance on Measures to Combat the Coronavirus (COVID-19) for short-time work compensation and the settlement of social security contributions provides for temporary deferment of payment of AHV contributions for a maximum period of 6 months. However, it seems rather unlikely that the liability of the Board of Directors will change in the event of a company's bankruptcy on the basis of this suspension.
- The liquidation of a company can also lead to the liquidation of the pension fund. This is a formal procedure that must be applied for in advance by the Board of Trustees to the relevant supervisory authority. In the case of collective or community foundations, on the other hand, the focus is on the dissolution of the affiliation agreement with the consequences provided for in the affiliation agreement and, if applicable, the additional consequences provided for in the partial liquidation regulations.
- It may be possible to sell a subdivision, including personnel, to a third party in the course of the liquidation of the company. Even if the pension fund is also liquidated, this may mean that a partial liquidation procedure must be carried out prior to liquidation. The same applies mutatis mutandis to the termination of an affiliation agreement.
- If the pension fund needs to be liquidated or an affiliation contract terminated where there are pensioners, these pensioners must usually be placed with a new pension fund provider. This can prove difficult in practice. If there is any willingness by the other party to take over the pensioners, an additional purchase is usually necessary. If it is not possible to transfer the pensioners to a new pension fund, they must continue to stay in the existing pension fund. However, a pure pensioner's fund has only a very limited ability to restructure, which is why pension obligations must be valued conservatively (so-called continuation interests). Both the transfer of pensioners to a new pension fund and their continuation in the existing pension fund thus generally leads to significant additional financial requirements. Depending on the original coverage ratio, the pension fund may fall into an underfunding and become insolvent. In this case, the security fund must also be included in order to guarantee the statutory benefits.
- Furthermore, it must be ensured that the pension fund's ability to act is guaranteed during the entire liquidation phase despite the decreasing number of insured persons (governance).
It will become clearer in the coming months how Swiss companies are surviving or have survived the current crisis. Companies and their pension funds should coordinate their efforts during this challenging period. The latter can even expand the scope of action for their companies.
The pension fund issues arising in this process may be at least partly new for those responsible. Our Pension Consulting Team will be happy to assist you in this process if required.
Summary
- The COVID-19 pandemic may affect Swiss companies and their pension funds with varying degrees of severity.
- Measures at company level often have an impact on pension funds.
- The pension fund offers various options to mitigate the economic consequences of COVID-19 for a company and its employees.
- It is therefore advisable to address the resulting challenges in a coordinated manner.
