The switch on the lens is just that - a switch that closes an electrical circuit in the lens to activate/de-activate the OIS, which is a set of mechanisms inside the lens body. These mechanisms are controlled by a computer chip inside the lens body. So by getting rid of the mechanical switch on the lens, all they're doing is moving that signal to activate/de-activate the OIS to the camera (through the lens contacts), so I'm guessing it'll be a menu function to do that. The circuitry inside the lens doesn't care where the signal comes from, so it doesn't need a physical switch on the lens body. Of course, in moving the switch to the in-camera menu, Panasonic engineers are assuming (correctly so) that most users don't play around with the OIS settings all that much to require fast direct access to it.
There is definitely cost associated with having that mechanical switch on the lens body. Not only is there the cost of the materials involved, but getting rid of the switch also allows the camera to be made of more plastic, thus reducing weight. While it doesn't seem like the cost of the switch is all that much, it adds up. Every $1 of materials in the build process normally adds (at least) $10 to the price of the product, so removing the switch probably allows them to shave about $50 off the price of the lens.
Hope this helps.
-Dragos