Private wealth and public squalor
Erich Solenthater reports on the Robeco survey of Swiss pension funds
Two years ago, Robeco Institutional Asset Management (RIAM) in Switzerland published the first survey on investment of Swiss pension funds. As first of its kind, it was highly regarded, motivating the group to repeat it for the period 1998/1999.
This time, 259 (1997: 239) pension funds participated in the survey, representing SFr225bn (E140bn), a big jump compared with SFr110bn in ther previous survey. This is estimated to be some 55% of total assets controlled by Swiss schemes. Average fund assets are SFr900m, which is far above Swiss median; however the survey gives the best perspective on the larger funds with assets over SFr100m. Altogether, 116 schemes belong to this group, of which 33 handle more then SFr1bn, five having in excess of SFr10bn.
However, figures of both assets and performance are not very accurate, because only 28% of funds apply market values to all asset classes. A majority of schemes still use acquisition costs or other methods when valuing bonds and real estate portfolios. But even equities are not always valued according to market prices.
Because of this, the figures of performance and assets remain unclear. The survey only says that the funds had returns of 9% per annum over the past five years. After years of bull markets, total returns of only 6% is predicted for the coming years.
While two thirds of state-sponsored schemes are unfunded to some extent and a few dramatically so, almost all of the private sector funds are considered to be sound, with 82% of them having an asset/liability-ratio of 100% or above. Most funds are in the range of 100-120%, which RIAM considers to be reasonable. By this reckoning, every fourth fund is over-funded. Almost one in 10 schemes have funding-ratios exceeding the high watermark ratio of 140%. They could belong to the increasing number of Swiss funds, that two years ago started reducing contributions or increasing pensions.
Some 55% of funds responding invest directly using a stockbroker. This figure shows an increase since the previous survey, when 45% managed investment on their own. While, this change may be due to some statistical quirk, nevertheless there is no evidence that in-house investment is loosing its importance, as has been widely feared in public discussions.
Investment decisions are taken in 13% (9%) of cases by schemes’ portfolio managers, and in 27% (27%) by external mandatories. Specialist foreign equities and bond mandates as well as those for Swiss shares are the most usual mandates given out by funds, though smaller funds of up to SFr100m prefer balanced mandates. More then half of mandates issued are smaller then SFr25m. Not big enough for efficient diversification, comments Graziano Lusenti, managing director of RIAM in Geneva.
A third of pension funds says they run a very small insignificant part of their portfolio, perhaps 10% or less, on a passive basis, while another third invests up to 40% of its shares passively. Only 15% of funds invest more then 70% of equities passively.
Passive management is gaining ground, according to the survey, although two years ago this crucial active/passive-question was not asked. That said, active mandates are still clearly dominant.
In general, asset allocation has changed little over the two years. In 1997, Swiss pension funds had 25% of their assets invested in equities, while in 1999 they show an average of 29%. They plan to increase this to 34%, with the proportion in foreign stocks increasing from 11% to 15%, accounting for most of this shift.
To a lesser extent, the foreign bond proportion is also expected to increase.
It appears that this increase in equity exposure by funds is likely to come on the back of good performance and not as a result of a deliberate shift out of other asset classes. Swiss bonds are expected to be the main losers, while real estate and loans are expected to shrink.
The survey gives no indication that new investments such as private equity or hedge funds will get any importance. In five years, an
additional proportion of non-traditional investments is expected to stay at around 1%, far too little to have any diversification impact on the portfolios, or to have funds considered as being serious players.
The survey finds a variety of approaches as to who is responsible for investment decisions, it can be boards, portfolio managers or committees. However, compared to 1997’s findings, control has improved, going on the fact that 30% of funds check their securities monthly. While most check asset allocation regularly, monthly performance measurement is regarded as too much effort by more than half of the funds.
Risk is mainly judged by volatility and by deviation from the benchmark, with the more sophisticated risk measurements such as tracking errors or value at risk still exceptions. Swiss pension funds have taken considerable strides, but they are still far from having appropriate risk controlls, says Lusenti.
Half of the funds never or only occasionally rely on external assistance, but a half work on regular basis with advisers, mostly from banks or a non-specified class of ‘asset consultants’. Surprisingly, only a quarter of schemes appoint specialised pension funds consultants. These seem to play only a minor role, less perhaps than often supposed. Most external advice is about the selection of fund managers (32%) and the identification of appropriate asset allocation (54%), while asset/liability studies remain the interest of just a minority (27%).
As in the earlier survey, the new one finds the costs of pension funds are a major topic. By publishing cost comparisons, RIAM has helped commendably to increasing transparency and competition in a widely unknown and neglected field. However the new survey still mentions “extreme difficulties in getting meaningful, detailed figures”.
Two years ago the survey found a notable lack of cost consciousness. Now Robeco comes to a more favourable conclusion: “A pleasing share of 43%(of funds) has overall cost below 0.3% of total assets.” A similar proportion have costs between 0.3 to 0.6%, but still every sixth scheme exceeds this benchmarks. Specific investment costs (excluding real estate) is for 95% of funds below 50 basis points. All-in-fees for Swiss securities are in most cases below 40bp, as they are as well for active management of foreign securities. Brokerage rarely exceeds 20bps.
On average costs for mandates, these are not low but “reasonable”, says RIAM’s Lusenti. But he adds, that better knowledge of market conditions and more use competition by rigorous selection contests could influence costs for the better.