Swiss pension funds: stable, but investment potential not exhausted
Despite the persistently low level of interest rates, the pension funds are well positioned overall. The returns on capital in the 2016 investment year were satisfactory. Broadly invested pension funds achieved sustainably better returns on capital in the markets. Overall, however, the pension funds did not exhaust the entire investment spectrum.
This year, 507 pension funds (previous year: 467) took part in the "Swiss Pension Fund Survey 2017", conducted by Swisscanto Pension Ltd. From the feedback, an overall picture emerges that can be described as "mixed". On the one hand, the Swiss pension funds reacted to the demographic development and the challenging markets by adjusting their investment strategy as well as the conversion rates and future pension obligations in 2016 as well. In order to secure their long-term stability, the pension funds are exhausting their room for maneuver. On the other hand, on the income side, the risk appetite has increased slightly, and investments in equities and alternative investments have been increased proportionately. On the risk side, the pension funds have further adjusted the relevant parameters to demographic and capital market requirements. "The focus of the pension funds continues to be on the technical interest rate and the conversion rate. The pension funds continue to refrain from mandatory lump-sum withdrawals from the extra-mandatory part," comments René Raths, member of the Board of Directors of Swisscanto Vorsorge AG, on the adjustments made by the pension funds.
Satisfactory investment return, but need for action indicated
Following the weak previous year (1.1%), returns on investment in the 2016 investment year were satisfactory, averaging 3.6%. The risk appetite of Swiss pension funds in the investment area increased slightly. While the share of fixed-income investments and liquid assets declined, investments in equities and real estate increased. Large pension funds also invested increasingly in alternative investments. They achieved an above-average performance of 4.0%. This contrasts with small pension funds with a performance of 3.3%. In the long term, the better return can be attributed to the broader diversification.
In contrast to the small pension funds, the large pension funds were more frequently affected by negative interest rates. Thus, 67% of the funds with more than 500 million assets reported having paid negative interest. Among the small pension funds, the proportion was 52%. Overall, this corresponds to an increase of around 3% compared with the previous year (58% compared with 55% in the previous year).
Too rigid BVV2 guidelines in asset allocation
Swiss pension funds further optimized their asset allocation last year. In this context, a high 44% of the pension funds stated that they had used the possibilities to exceed the limits of the BVV2 guidelines. Large pension funds, in particular, have invested proportionately more pension assets in alternative investments than required by the BVV2 ordinance. In contrast, small pension funds mainly use the extension article to increase their real estate quota.
Iwan Deplazes, Head of Asset Management Swisscanto Invest, comments: "There is no alternative to tapping into additional, illiquid asset classes if you want to continue tapping into the full return potential in the interest of insured persons in the future. After all, pension funds basically have the necessary long-term investment horizon to do so." According to the study, two-thirds of the pension funds would also welcome it if the upper limits for the categories were lifted.
Coverage ratios remain stable, technical interest rates decline
The average funding ratio of the pension funds remained stable in 2016, according to feedback from the Swiss pension funds. In the case of private-law funds, the funding ratio fell slightly to 109.7% (previous year 110.4%) despite good investment performance. In contrast, the funding ratio of the public law funds recorded a slight increase to 94.6% (previous year 92.0%). The development must be seen against the backdrop of a renewed drop in technical interest rates, with less progress being made in adjusting technical interest rates in the public sector.
The downward trend in technical interest rates has continued for 10 years in succession. As a valuation interest rate, the technical interest rate indicates how much interest can be expected to be paid on the accrued pension capital. For private funds, the technical interest rate now averages 2.19%, for public funds 2.55%. By comparison, in 2007 the values were still 3.51% for private-law pension funds and 3.69% for public-law funds.
Conversion rate already today at 6.0%
The conversion rate is falling in step with the technical interest rate. Since 2005, the mean value of the conversion rate has fallen from 6.9% to 6.0% in 2017 for men at retirement age 65. This means that the conversion rates of most pension funds are significantly lower than the BVG mandatory rate. The reason for this is that most pension funds are enveloping and have adjusted their conversion rates downward in the extra-mandatory area. The enveloping conversion rate applies to 85% of the insured. This has already fallen to the 6.0% mark. This corresponds to the minimum conversion rate provided for in "Altersvorsorge 2020". In addition, around 70% of the pension funds provide for conversion rates in the order of magnitude between 5% and 6% in some years.
Othmar Simeon, Managing Director of Swisscanto Pension Ltd., adds: "In order to maintain financial stability in the long term, technical interest rates and future pension obligations will continue to fall in the current low-interest environment. In 2016, however, it was still possible to earn good interest on pension assets thanks to the friendly capital markets. For example, the average interest rate on savings capital across all funds was 1.72%, while the minimum interest rate is set significantly lower at 1.25%."
Source: Swisscanto Pension Ltd.
