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No minimum interest rate equals more flexibility, Roland Matt
echo-interview, October 2015

No minimum interest rate equals more flexibility

Elipslife echo - Interviews with prominent business leaders

No minimum interest rate equals more flexibility

echo-interview with Roland Matt, Group CEO of the Liechtensteinische Landesbank (LLB)

elipsLife echo: Mr Matt, the banks in Liechtenstein seem to have done a better job of shaking off the suspicion of aiding and abetting tax evasion than their counterparts in Switzerland. Has Liechtenstein been smarter than Switzerland in this regard?

Roland Matt: I can only speak for Liechtenstein of course. But our country restructured its financial marketplace both in a very rigorous fashion and at an earlier stage than others did. In a policy statement of 14 November, 2013, the government affirmed its declaration made in 2009 to continue pursuing a tax conformity strategy. So it was no coincidence that Liechtenstein was one of the 52 countries that signed up to the 2014 agreement to automatically exchange financial data. As a result, our country is one of the so-called early adaptors, states that will actually begin implementing the information sharing as early as 2017, one year earlier than Switzerland.

and in regard to the relationship with the U.S.?

In this context, our measures are very similar to those taken by Switzerland. Regarding FACTA, the Foreign Account Tax Compliance Act enabling the U.S. to tax all accounts held abroad by individuals with tax liability in the United States, the solutions implemented by Switzerland and Liechtenstein are equally similar as are those dealing with legacy issues.

Did the Swiss National Bank's decision to remove the cap on the value of the Franc against the Euro and its introduction of negative interest rates impact the LLB to the same extent as it did the Swiss banks?

In principle, yes. The Swiss National Bank's decision had a general impact on the interest rate level which also influenced our business result. One case in point was the valuation of interest-rate swaps, the instruments used to hedge against a bank's interest-rate risks. A lower interest-rate level affected this valuation. Another example were clients' assets, some of which are denominated in foreign currencies. In the case of the LLB Group, approximately 50% of clients' assets are in foreign currencies. Should these assets decline in value as a result of lower exchange rates, then the earnings they are able to generate will shrink as well. That said, I should point out that the National Bank's decision has not impacted either our equity capital or our liquidity position. In addition, the LLB is currently not affected by negative interest rates on current accounts, since it remains within the SNB's exemption limit.

Roland Matt in an echo-interview

Like Switzerland, Liechtenstein is not an EU member, but is a member of the EEC. Does this fact give the LLB an advantage over its Swiss competitors?

Liechtenstein belongs both to the Swiss and European economic communities. As an EEC member, we have access to the EU's single market and our banks can benefit from the so-called EU Passport. So it is an advantage for us to be an EEC member. Additionally, our jurisdiction in Liechtenstein meets the regulatory requirements prevailing within the EU. All regulatory changes the country makes follow one clear goal namely, strengthening the integrity and transparency of our financial system and enhancing investor protection.

In recent years, banks in Switzerland have lost a great deal of goodwill and their reputations have suffered. Is the situation in Liechtenstein any better?

Our banks have been doing a lot in recent years to restore goodwill. Since the financial turmoil of 2008 and the collapse of Lehman Brothers in particular, the banks have been mired in a crisis of credibility. We're fighting to regain trust. Through creating greater transparency in our financial reporting, sound corporate governance and our efforts to establish clients' tax conformity, we have already made good progress along this road. But we still need to do more. We at the LLB are pursuing a concrete vision to be a model for best practice in ethics-based banking. Moreover, these standards not only apply to tangible financial practices but also to a brand of professional behavior characterized by integrity, respect, innovation and the pursuit of excellence.

The LLB has closed down its subsidiary in Switzerland and since 2013 has pinned its ambitions on Bank Linth. Have your expectations been fulfilled?

Very much so. The closing of LLB Switzerland was part of our "Focus2015" strategy. Our aim was to simplify the structure of our organization. This year, we sold the independent asset management company, swisspartners, as a final step in this restructuring process. Our strategy has helped us cut costs and reduce our corporate complexity. Today we employ about 950 people, approximately 25 percent fewer than at the end of 2012. We have also driven down our costs substantially and, above all, have made significant gains in efficiency and profitability. In Switzerland, our aim is to achieve growth through Bank Linth. This is a regional bank focused on the Swiss Market, which means it fits into our Group very nicely.

elipsLife echo-interview with Roland Matt

What are the drivers of entrepreneurial success in your view?

Let me mention three points here: Firstly, you need a clearly defined, focused strategy. Given our current business environment characterized by regulatory pressure and economic uncertainty, this is an absolute must. Secondly, you have to cultivate a robust culture with motivated employees and disciplined management. I regard this cultural factor to be highly significant by the way. And thirdly, to implement your strategy, a lean organizational structure is of the essence. The structure has to be designed in a way to provide optimum support both to employees and strategy. There's no guarantee here of course, but provided these three factors are mutually reinforcing, your chances of success are good.

The LLB currently employs 944 people. Is old-age provisioning, in the form of an attractive company pension scheme for example, a relevant topic during the hiring process?

Yes, this topic is relevant. The pension schemes provided by the financial services industry are generally speaking more generous than those offered by companies in other sectors. Bearing this fact in mind, this issue should actually be playing an even bigger role when we appoint new people. In my view, we fail to leverage the topic in the way that we should. The provision of these kinds of benefits does, after all, differentiate us from other companies.

…and is the topic important for your corporate decision making?

No, retirement provisioning is not a criterion in this context. For the LLB management, it is crucial that the company pension fund sits on a solid foundation. For this reason, we changed several years ago from a benefits-oriented system to one based on contributions. The parameters were also modified accordingly. We realized then that if we allowed the scheme to remain unchanged, it would eventually become financially unsustainable. So we had to put it on a strong financial footing for the future. Today, our pension fund is once again thoroughly sound and rock solid.

echo-interview, October 2015, Roland Matt

Liechtenstein has basically the same retirement benefits system as Switzerland, based on state, occupational and private schemes. How do you assess the standard of company pension schemes in your country?

Regarding occupational schemes in particular, Liechtenstein has replicated many of the elements from the Swiss system. Fundamentally, the standard in Liechtenstein is fine. However, some individual aspects could well do with improvement. For example, the savings component is higher in Switzerland than in Liechtenstein. But this is really not a terribly important topic right now since there are other more urgent challenges we need to deal with.

So what are the key issues in respect to occupational pension schemes?

The all-important issue is demographic change. We have an ageing society and, at the same time, our professionally active lives have tended to become shorter because higher education takes longer and early retirement happens more frequently. This means that the saving phase in our lives has shortened whereas the retirement phase has lengthened. These developments pose a major challenge. The returns on investment generated in the past have become all but impossible to achieve in the current environment of low interest rates.

Compared to Switzerland, Liechtenstein law does not require the pension funds to adhere either to a minimum conversion rate or to a minimum interest rate. The pension funds decide on these questions themselves and bear the responsibility. Is this an advantage or a danger?

I see it as an advantage. In Switzerland, occupational pension schemes differentiate between the mandatory and non-mandatory part, with the minimum interest rate only applying to the mandatory element. In Liechtenstein, there is no minimum interest rate requirement. Let me demonstrate the advantage to you with an example: We run the LLB pension fund foundation for Liechtenstein, a collective foundation which other companies in the country can join. Liechtenstein citizens pay very careful attention to which minimum interest rates are fixed in Switzerland. And usually it's the case that the interest rate here corresponds more or less to the rate level in Switzerland. The exception was during the 2008 financial crisis when, as a result of the negative market situation, we resolved to set a zero interest rate. Even with the interest rate at zero, the coverage level still dropped, however to a considerably smaller degree than it would have been the case had we needed to adhere to a pre-defined minimum interest rate level. My point is that in exceptional circumstances, forgoing a minimum interest rate level gives the pension funds more flexibility. At the same time, however, the pension funds compete with one another. And to survive in the market, they need to be able to offer competitive interest rates.

Roland Matt, Group CEO of the Liechtensteinische Landesbank (LLB)

All the talk at the moment in Switzerland centers on proposed changes to the retirement and benefits system which are likely to come into effect in 2020. In Liechtenstein on the other hand, a restructuring of the occupational pension system has already been earmarked for 2017. How has this been possible?

This has only been made feasible through intensive consultations between the major players in the country's financial market. I should add that the whole process has also been facilitated by the small size of country and the short distances involved. We in Liechtenstein are good at finding a consensus and always try to find and implement constructive solutions to issues.

Pension funds are facing tough times, above all as a result of our ageing society and low interest rates on investments. Are they – and indeed all of us – going to be victims of benefits promises that can't be financed?

I certainly hope not! I believe we're all intelligent enough to make the kinds of adjustments necessary to contributions and benefits to ensure the whole thing stays financially viable. I'm pretty confident that, despite having to make difficult decisions, we'll find a way keep the system sustainable in the future. It's just a matter of appreciating the realities of the situation and taking the appropriate measures. This will happen.

If you could give the pension funds some advice, what would it be?

Currently, the pension funds have gained some breathing space; their funding level has in many cases risen above 100%. However, this shouldn't be a cause for complacency. Now is the time to tread carefully, especially in respect to the interest rate. This should stabilize the coverage level and build a cushion. In addition, there is a need to adjust some of the key parameters such as the technical interest and conversion rates to the changed realities. Fine-tuning should now be the order of the day. Kicking the can down the road is not the smart thing to do.

Personal Profile
Roland Matt
Group CEO of the Liechtensteinische Landesbank (LLB)

Born in 1970, Liechtenstein citizen Roland Matt has a degree in business economics and has gained additional degree qualifications as a financial analyst, fund manager, investment analyst and finance expert. Before joining the LLB in 2002, Matt spent over 12 years with a private bank in Liechtenstein in the research and asset management area. His first role at the LLB was the management of the Investment Services department, subsequently taking on responsibility for the Domestic Clients business area. In 2009, he was appointed to LLB's Group and Business Management Committee. Up to March 2011 he had responsibility for domestic markets and institutional clients. Following this, he was made head of the International Market. In January 2012, he was appointed LLB Group CEO and Chairman of the Group and Business Management Committee.