10% of Swiss occupational funds now underfunded

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SWITZERLAND- One in ten of Switzerland’s 2,100 occupational pension schemes are underfunded according to government advisors and the urgent need to reallocate assets could benefit foreign fund managers.

An easing of asset allocations restrictions in Switzerland in response to the pensions crisis could encourage schemes to increase their exposure to foreign equity and debt says Cerulli Associates, the Boston-based research and consulting firm.

Since many Swiss mid-sized banks that hold pensions mandates lack asset management operations that can cope with foreign investments, the door will open up to foreign specialist managers.

Law states that foreign currency exposure and total equity allocation must not exceed 30% each. Pension funds are, however, able to get around this by seeking permission from the government.

According to Cerulli many foreign fund managers have already benefited from the reallocation of pension funds. Indexers have taken advantage of the increasing demand for passive portfolios – representing around 15% of Swiss pension assets – and global bond managers have exploited the permitted higher allocation to foreign-denominated debt.

From 1997 to 2001 foreign fund managers’ market share of assets under management grew from 2% to 6%. Yet the average Swiss pension plan still only uses about half of its permitted allocation to foreign bonds, and around a third of its legal limit in foreign equities, indicating significant room for growth.

Cerulli bases its prediction of growth in foreign fund management in Switzerland on comparisons drawn with Japan. Like Japan, Switzerland’s interest rates were slashed during the 1990s causing bond yields to fall.

In both countries, funds are heavy in domestic debt which has resulted in plan sponsors being forced to decrease guaranteed yields - the Swiss Finance Ministry has recently suggested reducing minimum investment returns from 4% to 3%, and re-evaluate asset allocation restrictions.

In Japan, such restrictions were almost completely eliminated, and between 1997 and 2001 Japanese pension plans had more than doubled their overall allocation to equities, and increased their aggregate foreign exposure by half. Investment advisory companies more than tripled their market share of Japan’s company retirement plan market place, and foreigners were the primary beneficiaries, explains Cerulli.

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