It came as a complete surprise to all – 15 January 2015 will be burned into the memories of Swiss Pensionskassen for a long time. It was the day the Swiss National Bank (SNB) decided to cut the peg of the increasingly stronger Swiss franc to the ever-weakening euro. 

For those pension funds unlucky enough to have believed the SNB would continue to take on currency hedging for them, approximately CHF30bn (€28.6bn) in unhedged foreign exchange exposure was wiped out. Even those with protections in place felt the impact when calculating their 2014 returns, which were around 200 basis points lower than the national average of 8%.

Pension funds were quick to assure members that buffers built up over recent years would be enough to offset the “short-term” losses. But a considerable chunk of those buffers is now gone, and the opportunities for alternative sources of return – equities, for example – have also diminished, as the country’s stocks fell by around 10% in the wake of the SNB’s surprise decision. 

Yields on 10-year Swiss government bonds have been closing in on zero in recent months. And then there is the problem of cash in pension funds’ portfolios to consider. The SNB recently made it clear that Pensionskassen – apart from the largest public pension fund Publica – would not be exempt from negative interest rates introduced on accounts beyond a certain threshold. 

Local economists point out that institutional investors, even had they wished to, could not hold all of their liquidity positions in actual bank notes, which are in short supply in Switzerland. The alternative – increasing foreign currency exposure – presents two problems. First, they have a legal cap on foreign currency exposure of between 20% and 30%, depending on the overall equity allocation. Second, large custodians including State Street and BNY Mellon introduced negative rates on large euro deposits in the autumn of last year, and similar ‘penalties’ have been in place for Swiss francs and Danish krone already for several years now. 

Last year, Swiss pension fund returns mainly came from equities, as well as a few older bond holdings that benefited from interest rates falling further. But how much longer can this be expected to last? And what can pension funds hope to do with all the new money pouring into the mandatory system? 

The reality is that the Swiss second-pillar pension system remains stuck in limbo. Even if the proposed reform package, the so-called Altersvorsorge 2020, passes Parliament, the government has already admitted that it falls short of what the system actually requires to remain sustainable over the long term. Jürg Brechbühl, director at the Swiss social insurance body BSV, recently confirmed that officials had been aware that their proposed cut in the conversion rate to 6% was insufficient, due to the necessity of making the reform palatable for referendum voters. 

A protracted low-interest-rate and low-return environment will only increase the pressure on the reform package, warns Christoph Ryter, president of the pension fund association ASIP. And, in light of this, many Pensionskassen have already adjusted various technical parameters in their system in recent years – the discount rate applied to active members’ accounts (technischer Zins) or the conversion rate, if possible, for example.

Some, such as the pension fund for the Swiss energy industry (PKE), have introduced flexible pension payouts for future pensioners – a measure until now taboo in a system where a pension, once granted, cannot be changed. 

Overall, the major adjustments are happening on the liability side of the balance sheet. As for the asset side, many are still waiting to see where the Swiss franc will end up, and how that might affect the local economy, stock markets and even real estate prices. 

In effect, Switzerland’s second-pillar pension system – despite being in the world’s top five, according to Melbourne Mercer – is still a work in progress.