Few towns can boast of having three castles, but Bellinzona, in the Swiss canton of Ticino, has merited a lot of protection down the ages.

Before man learned how to fly, the main route north out of Italy was via this strategic post in the Alps.

Romans, barbarians, nobles and bishops from Como and Milan fought to occupy the town and the fortifications are reminders of its historic importance.

But fast-forward to the third millennium AD and the strangers to Bellinzona are shoppers from the surrounding canton here for a day out. In these peaceful times even the castles have protection as Unesco heritage sites. Administration of the Italian-speaking canton is carried out in handsome if less imposing offices in the shadow of the fortifications.

Here the discovery of some lost medieval treasure would not go unwelcome, however. If neither Bellinzona nor Ticino is in fear of external attack, the region’s finances are under strain from within. Specifically, the pension fund for state employees is about SFr1bn (E650m) short of full cover. If all the benefits – to current as well as retired civil servants – had to be realised tomorrow, the fund could only offer 71% of the expected total.

This scenario of liquidation is slim. As is the case in most European countries, pension funds for public sector employees in Switzerland are guaranteed by the state. Ticino ultimately underwrites its own fund. This should be a bulwark, but Ticino, the region of Italian-speaking Switzerland, including Locarno and Lugano, has not enjoyed the healthiest of finances in the past decade.

By 1999 it had to cut employer contributions to the fund by 3% to save money. Members’ contributions, meanwhile, were pushed up by 2%. From that year the fund also began accounting for the liabilities of dependants.

The rules governing Swiss occupational funds say employees can never pay more than sponsoring employers. From 1999, the Ticino fund has required 10.5% from members’ pay-packets and 11.6% from the employers (apart from the state, smaller public sector organisations and foundations). More generous than many new pension schemes with defined contributions, the Ticino fund nevertheless suffered during the bear market. Its coverage dropped from almost 98% to just under 80% in 1999 and nearly 70% at the end of 2002. Last year saw a slight recovery.

If investment returns had increased, the fund might have repaired the expanding hole in its coverage. The markets’ decline have had the opposite effect. In spite of a conservative asset allocation, with just 15% in equities in 2000, the fund’s value suffered. It returned just under 3% in 2000 then diminished by 0.35% in 2001 and 2.86% in 2002. Last year brought a little comfort with just over 6%.

But Edy Dell’Ambrogio, the fund’s manager, points out that if nothing is changed, the deficit could be SFr3bn in 15 years. The only immediate solution is to raise contributions again, this time for both employer and members. Proposals are with the state legislature for employers – of which the canton itself is by far the largest – to pay 15.6% of salary; and members to pay 11.5%. Altogether that signifies just over 27% of the pay packet in order to pay an occupational pension worth about two and half times that figure. Moreover, the fund intends to pay only 50% of inflation-linking on future pensions. Who said pensions aren’t expensive? These proposals are just to get funding back up to 90%, not 100%.

Dell’Ambrogio’s candour and conviction that all parties must work together to strengthen the fund is refreshing. He has been involved in state finances since 1986 and knows how the local politics operate. In its public statements, readily available on the web, the Ticino fund is honest about its condition and the solutions.

Dell’Ambrogio believes that there is no real alternative to raising funding and uses the SFr3bn black hole as an alarm bell to ward off any procrastinators. The fund’s commission, which comprises 20 people, drawn equally from employers and members, has backed the recovery plan. It is now up to the local legislature to decide. Dell’Ambrogio is confident permission will be granted.

It is too late to set out on an adventurous quest for higher returns because nothing can afford to be lost. Yet it is worth mentioning the rather simple investment management structure used. The Ticino fund has employed six balanced managers for several years to manage its bonds and equities. These assets account for about 88% of the fund’s SFr2.5bn total value.

All six underperformed the total benchmark for the five years 1998 to 2002. La Banque Privee Edmond de Rothschild did best with an annualised 8.59%, against the benchmark 9.85% (see table 1). Banca della Svizzera Italiana, UBS and Credit Suisse Private Bank all at least managed more than 5%, but Banca del Gottardo earned 3.5%, or 0.69% a year. Bottom of the lot was the local state bank, Banca dello Stato del Cantone Ticino, which lost 2.41% of the value of its portfolio over five years.

Dell’Ambrogio puts the unusual structure in perspective. Until 1987 the fund invested entirely in state bonds, for which it received 5% fixed return. It only opened out to other assets that year and to equities in 1995. The local bank may be the worst performer, but the fund has some sense of solidarity. It will reduce the mandate to Swiss-denominated bonds in recognition of the poor performance, but clearly there is sympathy for a fellow Ticinese institution. The fund and bank co-operate on mortgages to members. This is a service which is common among many European pension funds outside the UK and Ireland, although some Swiss funds have stopped the service.

Of the 11 employees of the Cassa itself, only Dell’Ambrogio works full-time on securities investments. Most of the others concentrate on those mortgages, benefits and administration.

The Ticino fund offers its members the loan to buy new accommodation at 3%. The business goes straight across the street to the Banca dello Stato del Cantone Ticino. But Dell’Ambrogio points out the cantonal bank is the safest place around. Asked about operational risk, especially if the bank suffers major mismanagement or fraud, he replies: “If the bank dies, we all die.”

The fund takes external advice from PPC Metrics in Zurich. As well as investment manager advice, the consultancy has made the forecasts on which the proposed rise in contributions is based.

The inhabitants of Ticino face another battle in their history. Ironically, the grandeur of Castello Montebello, Castello di Sasso Corbaro and Castelgrande may yet again offer some protection. As tourist attractions, the foreign money the trio lure to Bellinzona supports employment and helps fill the canton’s coffers. There is certainly a little space.

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