67 takes into account the pension fund's specific characteristics and the long term evolution of influential (exogenous) factors.

Table 24 indicates to what extent pension funds differ in their technical interest rate. Firstly, the min/max spread ranges from 2.5 percent to 4.5 percent. Technical rates below 3.5 percent are almost never used to compute actuarial liabilities of _retirees_ , but only of active contributors. Secondly, on average, the technical rate slightly decreased from 2004 to 2005. Thirdly, pension funds under public law generally use higher rates than those funds under private law. A higher technical rate generates a higher funding ratio. A 1 percent increase in the technical rate increases the funding ratio by approximately 10-15 percent by decreasing the present value of future liabilities. Note that pension funds under public law not only feature higher technical rates, but also lower funding ratios on average.

The pension funds (and thus their submitted reports) are supervised by two different agencies. Firstly, each pension fund has to choose a private supervisor as well as an expert for occupational provision (i.e., the technical expert). The former agency checks the administration of the business, its accountancy, and the investments. The latter expert audits the pension fund's ability to fulfill its obligations (at any point in time) and checks for compliance with the actuarial requirements (i.e., of both the provision of services and its funding). Secondly, each pension fund is supervised by a governmental supervisory authority. This authority, which is responsible for all pension funds in each canton, inspects, among other things, the reports of the fund's supervisor and of the technical expert.

**<u>Table 24  Technical Interest Rates</u>**

||Private||Public||Total||
|---|---|---|---|---|---|---|
||2004|2005|2004|2005|2004|2005|
|Max|4.00%|4.00%|4.50%|4.50%|4.50%|4.50%|
|Mean|3.85%|3.81%|4.07%|4.06%|3.90%|3.87%|
|Min|2.75%|2.50%|3.50%|3.50%|2.75%|2.50%|

Source: Swisscanto (2005), p.48, Graph 2

# **_5.4.1  Underfunding of Pension Funds_**

The financial situation of pension funds is reviewed annually<sup>59</sup> . Since the review is based on balance sheet data, the reference points are 31.12.2003 and 31.12.2002, respectively<sup>60</sup> . The first overview of the extent of underfunding of pension funds in recent years is given in Table 25. Note that the “collective-institutions” were excluded from the analysis, and that the following numbers of pension funds with funding deficits would be greater if a lower technical discount rate had been used. Recall that a 1 percent decrease in

> 59According to Art. 44a BVV 2, the responsible agency is the Federal Office for Social Security, and the data is provided by the regulation authority.

> 60All pension funds are legally obligated to submit a detailed report on their business and their financial situation each year. If a pension fund does not submit this report, a strict procedure is enforced. Obviously, not all pension funds handed in their documents on time. Hence, the explored data represent 83.8 percent of all pension funds in 2003, and 81.1 percent of the pension funds in 2002. Still, the data is reliable, especially since subsequent statements did not change the data substantially.