Swiss pension funds are reassessing how far to hedge their foreign currency exposures as they tilt further into risk assets and face a weaker US dollar. The debate is sharpening as allocations to global equities rise and currency swings increasingly influence performance.
Foreign currency risks are climbing as pension funds reinforce equity allocations, according to Andreas Rothacher, head of investment research at Complementa. The recent increase in foreign exposures is largely an outcome of strong global stock markets rather than a deliberate FX bet, he noted.
Rothacher said foreign currency exposure is now a standing item in investment discussions, though schemes “act prudently”. He added that exposures are shifting across asset classes rather than solely increasing at portfolio level.
One of the more active movers is St Gallen Pensionskasse (SGPK). The CHF12.4bn (€13.3bn) fund will lift its strategic foreign currency allocation from 17% to 20% from 1 January, driven by a decision to increase emerging market equity exposure from 2% to 5% of assets, chief investment officer Walter Friedlein said.
This year’s asset liability management (ALM) study prompted the rethink, with SGPK reviewing the long-term return and diversification benefits of its foreign currency assets.
Emerging market equities offer the prospect of attractive returns in the long term, and improve the geographical and currency diversification of the fund’s portfolio, Friedlein said.
SGPK invests largely without currency hedging in emerging markets, meaning the shift automatically pushes the fund’s strategic FX share to 20%.
Elsewhere, the CHF9.2bn Bernische Lehrerversicherungskasse (BLVK) has also rebalanced its strategy. It divested from convertible bonds and emerging market equities, reallocating to Swiss real estate, global equities and foreign currency corporate bonds, according to chief investment officer Theodor Tillmann.
BLVK’s unhedged foreign currency exposure remains steady at around 41%, and no further changes are planned this year, he said.
The fund hedges 75% of its USD, EUR, GBP, CAD and JPY exposures with an overlay. FX forwards are executed on rolling two-month contracts, meaning half the hedge is renewed monthly.
Hedging ratios
On average, Swiss pension funds currently hold around 17% of assets in unhedged foreign currency investments, with the remainder either in Swiss franc assets or hedged back.
Hedging ratios have been broadly unchanged this year, said Stefan Beiner, partner at c-alm. But approaches diverge: some schemes have increased hedging amid geopolitical risk, while others have pared it back to capture interest rate differentials and the dollar’s depreciation.
Beiner expects this fragmentation to continue. Most funds will likely stick close to current levels, adjusting selectively as market conditions and risk tolerance shift.
Asset-class characteristics are a key driver. Fixed income is usually fully hedged, except for local emerging market debt, where FX carries are integral to returns, while equity hedging ranges anywhere from zero to full.
Private markets, he added, are less hedged because overlays are more complex to implement.
Diversification benefits from unhedged exposures diminish once foreign assets exceed roughly 20% of a strategic allocation. As pension funds lean deeper into risky assets, most prefer to hedge a substantial share to keep currency volatility from overwhelming Swiss franc liabilities.
“This disciplined approach ensures currency risk does not dominate portfolio outcomes, especially in an environment of persistent geopolitical and macroeconomic uncertainty,” Beiner said.
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