Swiss pension funds seek to circumvent Minder voting requirement – sources

Smaller schemes shifting direct holdings to equity funds

It’s emerged that some Swiss pension funds are getting rid of their direct shareholdings in listed Swiss companies and switching to funds in an effort to circumvent the new Minder law that requires them to vote at annual general meetings (AGMs) from next year.

The so-called Minder initiative, which was overwhelmingly approved in a referendum in March 2013, mandates Swiss companies to hold binding shareholder votes on executive compensation at AGMs – and requires Swiss pension funds to participate in voting. The schemes also must report to their beneficiaries on how they voted.

The idea is that as guardians of social capital, Swiss pension funds ought to express the will of a Swiss populace scandalised by examples of gross executive pay at household-name firms.

However, due to the way the Swiss parliament transposed Minder into law, the voting requirement only covers shares that are directly held.

So, if a pension fund owns shares through an equity fund, there is no legal requirement to vote – though several schemes do instruct fund managers to vote their shares.

As a result, numerous industry sources have told Responsible Investor that smaller schemes are divesting their direct holdings and shifting the money to equity funds. Such a tactic would not necessarily change their overall exposure to Swiss equities, the sources, who asked not to be identified, said. There are more than 2,000 pension funds, which own about 8% of the share capital of listed Swiss companies, half of which is estimated to be in funds and the other half held directly. The reason for the move to indirect holdings, the sourcessaid, is that pension funds want to avoid the perceived additional work and cost associated with the new voting requirement.

The schemes’ managers do have the option of abstaining during the vote on executive compensation – though they still have to report to their beneficiaries on how they voted.

“This is all a bit too much exposure for Swiss pension funds that are known for staying behind the scenes,” said an asset manager that does business with the schemes.

Alternatively, Swiss pension funds can hire a proxy firm like Ethos or zRating to get a recommendation on executive compensation and then have the firm vote on their behalf. But the costs involved – which the proxy firms say are minimal – have been less of a hindrance for bigger Swiss pensions than smaller ones.

ASIP, the Swiss pension fund association, denied that its members were trying to circumvent Minder by switching to equity funds. “We don’t see any evidence of a mass movement from shares to funds. And I personally think the new requirements will not affect the investment strategy of the members,” ASIP Managing Director Hanspeter Konrad told RI.

Dominique Biedermann, Chief Executive of Ethos, believes that one of Minder’s drawbacks is the exemption of fund managers from the voting requirement.

Speaking at an event in Zurich last week, he said Ethos had been lobbying politicians in Berne to get rid of the exemption: “We haven’t gotten very far though, as there is a centre-right majority in the Swiss parliament that was not happy about Minder in the first place.”