Pension funds feel the upswing again

2024 will be an important year for Swiss pension funds: On September 22, 2024, a vote will be held on the BVG reform. And it seems that the pension funds will be able to put themselves in a good position in the run-up to the vote. The eagerly awaited new Swiss pension fund study by Swisscanto by Zürcher Kantonalbank states that the pension funds have been able to halt their long-term reduction in benefits and that the 2nd pillar is stable. 483 pension funds representing almost 4.1 million insured persons and managing assets of CHF 770 billion took part in the study, the 24th edition in this series.

High returns enable expansion of reserves and benefits

The good stock market year 2023 is responsible for the stable financial situation of Swiss pension funds. According to the study, pension funds achieved an average net return of 5.1%. This enabled the pension funds to significantly increase their financial cushion. After the coverage ratio of the private-law funds fell from 122.1% to 110.1% in 2022 due to the negative returns, it was back up to 113.5% by the end of 2023. Almost half of the funds have replenished at least 75% of their fluctuation reserves and would therefore be ready for benefit improvements.

The average return of the top ten percent of funds in 2023 was 8.2 percent, while the worst ten percent of funds achieved 2.3 percent. "The higher performance of the successful funds benefits policyholders: the top performers once again had a high coverage ratio at the end of 2023 and have largely built up their fluctuation reserves. This has enabled them to pass on their good performance to active insured persons and pay interest at 3.7 percent, well above the BVG minimum interest rate," says Iwan Deplazes, Head of Asset Management at Zürcher Kantonalbank. The worst funds paid interest on the retirement assets of active members at 2.0 percent; the average across all the funds surveyed was 2.44 percent. The development of conversion rates also points in a positive direction. Following the downward trend over the last 15 years, the curve is now flattening noticeably. The average conversion rate is currently 5.31%, and the funds expect it to reach 5.23% by 2029.

The Swisscanto Pension Fund Study 2024 confirms what the Occupational Pension Supervisory Commission (OPSC) was already able to communicate at the beginning of May: The financial situation of Swiss pension funds developed positively again in the 2023 reporting year. However, in its communication, the OPSC warns against already talking about a return to stable conditions. This is because geopolitical tensions in particular are increasing and creating uncertainty. However, it also states that the pension funds are "for the most part well prepared to face this uncertain future".

Flexible benefits instead of long-term guarantees

The indicators suggest that pension funds will soon be paying higher benefits again - not least because the outlook for returns has become more optimistic since the turnaround in interest rates. The funds expect a return of 3.0% in 2024, compared to 2.7% in the previous year. The start to 2024 has already been promising, as can be seen from the Swiss Pension Finance Watch from Willis Towers Watson (WTW) for the first quarter of 2024. The net pension fund obligations of Swiss employers were able to make up for their losses from the last quarter of 2023, according to the report. Pension assets grew significantly by 5.0% over the quarter and interest rates on corporate bonds remained fairly stable. The strong position of net pension obligations over the last two years thus continues despite a temporary slump at the end of 2023, WTW notes. The coverage ratio rose by 6.2%, as shown by the WTW Pension Index. It rose from 119.9% (December 31, 2023) to 126.1% (March 31, 2024). This upward trend, as shown by all the studies mentioned here, is also reflected in the technical interest rate, which sets out the pension funds' long-term return expectations. The average across all funds rose from 1.54% to 1.57%.

Despite the positive signs, pension funds are reluctant to increase their benefit guarantees. Only three of the 483 funds surveyed have raised their conversion rate. "Although 14% want to improve benefits for pensioners this year, this also shows a reluctance to make long-term commitments: Only 39 percent of these funds are granting pension increases. The remaining 61% are relying on one-off payments," says Heini Dändliker, Head of Key Account Management and Head of Corporate Clients Market Switzerland at Zürcher Kantonalbank.

Exposure to market opportunities and risks

The trend towards flexible benefits can be interpreted as a reaction to the experiences of the last 20 years. The repeated turbulence on the stock markets has increased pension funds' need for security. They are looking for ways to react flexibly to developments on the financial markets. This change has direct consequences for insured persons: If fewer benefits are guaranteed, they are increasingly dependent on stock market developments. This means that policyholders are increasingly bearing the risks of the investments. If prices rise, the pension scheme benefits - if prices fall, the pension scheme suffers.

When returns are high, as they were last year, insured persons benefit: pensioners from one-off payments and active insured persons from higher interest on retirement savings. According to the Swisscanto study, these earned an average interest rate of 2.44% in 2023, with funds with higher returns tending to be more generous. The conclusion can be drawn: Pension funds have stopped the redistribution from young to old and the funded system is once again living up to its principle.

Pension fund comparison

Independently of the studies by Swisscanto, OAK BV or WTW cited here, we interviewed some of the most established Swiss pension funds individually. We have used the key figures provided by them in an overview on a double page compiled.