Federal Council passed a message with new provisions on broker compensation

At the end of November 2019, the Federal Council passed a message on the submittal entitled the Modernisation of Supervision in the First Pillar and Optimisation in the Second Pillar of Old-age, Survivors' and Disability Provision. The message includes a new proposal for a legal provision regarding broker compensation. This proposal was not the subject of the consultation procedure for the aforementioned submittal and has been newly incorporated into the message. The reason for these amendments was the interpellation by National Council member Mathias Reynard and criticism from some occupational pension benefits experts.

Brokers support companies mainly in their search for a suitable pension provider. They thus play an important role in helping companies to find their way in the increasingly complex and competitive Swiss occupational pension benefits market, to understand the various offers and their risk and opportunities, and finally to be able to fulfil their obligation to affiliate with a pension provider under Art. 11 para. 1 of the Swiss Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans (hereinafter referred to as BVG).

The majority of brokers are compensated via so-called brokerage fees. These are paid for the entire duration of the contract by the pension fund to which the company is affiliated,¹ often as a percentage of the risk premiums.²

The Federal Council has already stated in its response to Reynard’s interpellation that there is a need for action, as brokerage fees paid by pension funds to brokers for orders in which the employer acts as principal are not in the interest of the insured and are therefore not compatible with the pension objective. This could also lead to false incentives, which would increase distortions in occupational benefits.

In the specialist literature, opinions on the subject vary widely. While some authors advocate a ban on the current brokerage model and a cost-based model with payment by the employer as the principal, others are in favour of retaining the current brokerage model and, in some cases, creating more transparency.

Those advocating the preservation of the current brokerage model argue that the broker’s activity would mainly serve the insured and that the current provisions would already be sufficient if they were applied consistently. This is with reference to Art. 48k para. 2 BVV2, which would stipulate that brokers must disclose their compensation in writing on first contact and must comply with the accountability and disclosure obligations under the mandate law.³

The proposed provision on compensation for brokers

The Federal Council does not intend to ban the activities of brokers, but rather to improve transparency. Based on Art. 69 of the draft BVG, the Federal Council should be able to regulate under which conditions a pension fund may pay compensation for brokering pension transactions and under which conditions insurance institutions may charge such compensation to their operating accounts. The message further describes that the Federal Council must take the following aspects into account within the scope of its regulatory competence:

• Pension funds that have called in a broker to assist them may also compensate them. 
• If, on the other hand, the contractual relationship with the broker is not established by the pension fund, there is no reason why the pension fund should pay the broker's compensation. Firstly because there would be no contractual relationship between the pension fund and the broker, and secondly because a conflict of interest on the part of the broker would otherwise result. The latter because it would not be possible to determine whether the broker has worked for the best solution for his client or for the solution that brings him the highest compensation.

Furthermore, the competence of the Federal Council to specify the tasks of the auditors in connection with the compensation to the brokers should be introduced. The auditors should expressly be given the task of checking whether the compensation paid is consistent with the legal regulations and thus with the interests of the insured persons and the appropriate use of the pension assets.

Assessment of the submittal

In view of the brokers’ important role in the current BVG environment, it is understandable that the Federal Council does not intend a general ban on the activities of brokers. Nevertheless, it should be noted that the regulation proposed by the Federal Council is likely to change the broker market. This is because all cases in which the contractual relationship with the broker is established via the employer should, according to the new provision, only be compensated directly by the employer. In other words, the introduction of such a provision would mean that the costs of the brokerage activity would no longer be indirectly compensated for through premiums or contributions, which (depending on the current extent to which the brokerage costs incurred are passed on to the employer through premium or contribution payments) could change the employer's costs for the brokerage activity accordingly. Particularly in the case of small companies, professional advice could therefore be partially or fully dispensed of during the search for a suitable pension fund. It remains to be seen whether this regulation will be upheld in the context of parliamentary deliberations.

^{1 If a pension fund has reinsured all or part of its risks with an insurance fund, the insurance fund generally pays out the brokerage compensation.
2 BBl 2020 1, p. 51 f.
3 In this sense: BUR BÜRGIN/MURESAN, Broker-Courtagen, Das Kind nicht mit dem Bade ausschütten, in: SPV 09/19, p. 96.}