Major insurers drawn further into pension fund crash scandal

Two of Switzerland's biggest private insurers, Zurich Life and Geneva Life, are faced with charges amounting to more than SFr350 million each in a scandal involving Vera/Pevos, two pension funds that went bankrupt in 1995.

The two multi-national insurers, which already had seven charges related to the Vera/Pevos scandal laid against them earlier this year, are facing 11 further charges in civil and insurance courts in the cantons of Zurich and Geneva.

The new charges, two of which amount to SFr158 million alone, were announced by the plaintiffs acting on behalf of the creditors, as well as representatives of the security fund created in the 1985 pension fund law to insure pension funds. The security fund is also a plaintiff.

With losses of SFr200 million, the Vera/Pevos case is the biggest pension fund scandal since Switzerland made private pension schemes financed by employers and employees obligatory in 1985.

It is alleged that the directors of the Vera/Pevos funds misused the means of 2,000 insured persons to their own profit from the mid1980s to 1995 and that high-ranking officials of Zurich Life and Geneva Life colluded with them.

Liquidator Christoph Degen, speaking for the plaintiffs, said on Thursday that the insurers played anything but a passive role in the scandal.

“Their representatives invented the fraudulent scheme. They were present at the meetings in which high-risk investments were decided and knowing full well that the pension funds had no capital of their own, accepted pension policies as securities against their loans,” Degen said.

“The Vera/Pevos scandal is a real debacle”, said Otto Piller, director of the federal office for social security who was also present at the presentation of the charge. “It did great damage to people’s confidence in our system of private pension funds.”

The Vera and Pevos funds were created in the early 1980s by Albert Heer, an industrialist in Olten, canton Solothurn. They offered pension schemes to small and medium-size companies which could not afford a pension fund of their own. Vera/Pevos in turn re-insured themselves with Zurich Life and Geneva Life.

In 1985, both funds pooled their resources to create a separate Vera/Pevos investment fund, which subsequently purchased 42 plots of real estate. The fund then built apartment and office blocks, but was forced to sell or let them at a loss.

The doomed investments were financed by loans from Zurich Life and Geneva Life. Crucially, the two multi-national insurers accepted Vera/Pevos’ stock in insurance policies as securities.

The practice whereby pension funds can mortgage insurance policies is legal according to Swiss law, but highly regulated. As a result of the Vera/Pevos scandal, the government will shortly introduce new legislation to tighten controls or outlaw the practice altogether, Piller announced. “We must get a grip on hangers-on who want to get a cheap ride on other people’s money”, he said.

According to the plaintiffs, the Vera/Pevos fund management, which included delegates of Zurich Life and Geneva Life, never made the usual assessments before deciding on their investments. “Nobody was concerned about the only legitimate interest – that of future pensioners. Instead, everybody had their own interest in mind”, Degen says.

The investment fund routinely awarded building and administrative contracts at high costs to their own circle of friends, most of them Heer affiliates and associates. In addition, large commissions of five per cent were paid to directors and middlemen for loans and contracts.

The policy was even part of the Vera/Pevos pension fund’s aggressive recruitment of small and medium-size businesses, many of them in the building sector, to their pension scheme.

“We were promised a lot, but it was a marketing gimmick”, a representative of a duped building firm that insured its employees with Vera/Pevos said at the presentation. “Only those in the inner circle did actually get contracts.”

None of the 2,000 insured persons has suffered any individual losses, due to the security fund in the pension fund law. The fund has paid an unprecedented SFr72 million until now to cover the Vera/Pevos losses.

by Markus Haefliger