Pension Planning and private banking

Interview with Philippe Gay, Executive Vice President at Lombard Odier, Head of Swiss Offering

This article was published in L‘Agefi INDICES, October Issue

Swiss 1e plans are a type of pension solution that offer investment choice. It allows individual employees to choose from a range of investment strategies for earnings above a salary of CHF127,980. They have the potential to significantly change the face of Swiss pensions.

The 1e plans  for  above CHF 127,980 continues to grow. Often, it has been suggested that their potential could reach tens of billions of francs. Credit Suisse have cited CHF 50 billion. How do you see this market evolving?

We are talking about a multi-year process where information becomes more widely acknowledged, and those concerned realise the benefits they could enjoy. The plan gives policyholders control over the strategy for managing over-obligatory assets. If everyone became aware of the added value which this paradigm shift offers, the market potential could exceed CHF 100 billion in the long term.

For an employer, this is an opportunity to have more flexibility. The new provisions will enable employers to use the occupational pension system as one of the criteria for motiving its managers, without forgetting the concept of de-risking, by abandoning fluctuation reserves and thus unwinding their balance sheet. Policyholders can now consider their pension assets to be part of their total assets. And thus have their say in order to enhance it more effectively, and according to their personal objectives.

Many policyholders often under-exploit the potential of their pension provision and do not sufficiently benefit from the gaps they contain. At the same time, the interest rate environment does not improve the situation of the “third contributor”¹, which is currently at half-throttle.

Does this mean that the attractiveness of 1e plans will be affected if interest rates rise?

Interest rates, for example at 4% or 5%, would be largely good news for the third contributor. However, before rates rise, the current context presents an opportunity to adapt and develop new models. Everyone has been talking about the over-obligatory part of pillar 2² for the past 2 years. With eight years of expertise and experience, Lombard Odier has been a pioneer in this field. To return to your question, the current attractiveness of the 1e plans is not related to interest rate trends.

So how do you explain the craze for 1e plans?

They represent a new paradigm that allows each policyholder to choose the investment strategy applicable to his or her over-obligatory assets. The 1e plan and its management are the responsibility of private banking. This means that policyholders actively shape their pension planning.

An essential aspect of this new situation is the understanding of the issues at stake, but also transparent access to over-obligatory assets, at all times. There is no longer any need to receive a report once a year, nor to forego a contact person. Our customers don’t find themselves staring at a black box. Rather, they can monitor the development of their pension assets in real time with their private banker, who will integrate these over-obligatory BVG³ assets into the overall asset analysis.

It is reassuring for them to be able to access the composition and valuation of their assets, particularly in the event of major market movements. And they can potentially decide to adapt their strategy with all the information to hand. Not to mention that call this can be done from your smartphone, thanks to the platform we have developed.

At Lombard Odier, the 1e policyholders are private clients. We offer them a comprehensive approach that takes into account pension assets as an integral part of their portfolio. We advise them on how to structure all their assets, whether these are private or linked to their firm's activities or their retirement plans. Each policyholder is advised directly by their own banker. The person who manages the pension assets is always the same professional, working with a global view of their policyholder’s situation.

Who do you target with your 1e plans?

Our clients are entrepreneurs, CEOs, executives, self-employed professionals, small business owners and so on. We have for example SMEs among our clients, doctors and lawyers. On a daily basis we work with owners of small companies. Entrepreneurs tend to put all their energy into their firms and to devote less attention to their wealth planning. It is essential to help them to develop a more comprehensive vision that encompasses both their personal situation and that of their firm, in the short, medium and long term. The management of their over-obligatory pension, which they have not used, or have used very little until now, offers them an opportunity to work out how to value the assets they hold in their company. The owners are thus implementing a diversification of their assets by reallocating part of their shareholder accounts to pension solutions. As soon as the assets are no longer solely concentrated on the company, there are two, immediate major results: retirement planning and a reduction in overall risks.

It is clear to us that this type of clientele suffers from a distinct lack of information. Entrepreneurs have little time left to think about their own situation after managing salaries, orders etc.

In February, Lombard Odier launched three asset allocation funds dedicated to the management of pension assets. What changes has this brought?

We have enhanced our BVG strategies by adding investment funds to respond to changes in the law. Each over-obligatory fund can offer a maximum of ten investment strategies to policyholders, including a “low risk” strategy. Each strategy must produce the same result for all policyholders who have chosen it. As a result, the use of funds has become a legal requirement when an over-obligatory plan serves many policyholders. Our approach is characterised by two main aspects: the consistent transparency of the information available to policyholders and a time horizon that is deliberately shorter than the usual BVG indices. While transparency is part of our fundamental asset management offer, the notion of a time horizon makes it possible to adapt the management strategy to the objectives of policyholders and not to those of a standard basic mutual pension fund. One reason is that retirement is coming sooner for our clients. We therefore propose a time horizon that varies from three to five years for a defensive profile and from seven to ten years for the most aggressive profile.

What characterises the allocation within these funds?

We are open and avoid imposing an unnecessary straitjacket on ourselves. Our BVG funds – my Private Pension Funds – offer a mix of funds and direct lines, invested in the main asset classes, which means they are not funds of funds. We invest for our clients as we do for ourselves.

Lombard Odier is committed to placing sustainability at the heart of its strategy. Does this also apply to your 1e plans?

All our portfolios are analysed according to a sustainability index. We are also able to measure the carbon intensity of a portfolio when our clients so wish. Sustainability is not only a philosophical issue, it also harbours potential for economic added value. We are convinced that those companies with the most sustainable position will be the ones that benefit the most from the structural changes under way in our societies. We see it as a long-term performance model.