Basel pension fund reveals details of alternatives strategy
The pension fund for the city of Basel (PKBS) has hired Goldman Sachs and the Institute for Financial Research (IFR) to run its first exposure to commodities.
As per year-end 2016, the CHF12bn (€9.8bn) fund had made its first foray into alternative asset classes starting with a 3.5% commodities allocation, according to the Pensionskassen’s annual report..
The mandates are based on the Bloomberg Commodity index hedged to Swiss francs, but “deviations exceeding a pure passive index reconstruction are allowed”, the PKBS noted in its annual report.
Additionally, the pension fund board agreed for “a significant part” of the commodities exposure to be direct investments into physical gold, for which the Basel cantonal bank would serve as a custodian.
The commodity exposure can be built up to 5% of the overall portfolio and formed part of a new alternatives segment in the PKBS’ portfolio decided on last year.
In total, the alternatives segment can grow to 11% of the portfolio, but at the end of last year only one more investment had been made in this segment.
In Q4, the fund made its first foray into senior secured loans via the collective investment foundation “Zürich Anlagestiftung”. Further investments up to a quota of 2% of the portfolio are planned.
Another exposure that is currently being built is private equity, with PKBS aiming for a quota of 5% over the next few years.
For the private equity strategy, PKBS has hired Basel-based BioMed Partners, a venture capital company focusing on the healthcare sector.
Overall the alternatives quota has not yet reached its benchmark performance given that the exposure is still limited.
“Building investments in this segment takes more time,” the PKBS explained in its annual report.
Nevertheless the alternatives exposure was one of the main contributors to the pension fund’s annual performance of 4% for 2016.
Alternatives contributed 6.9%, while foreign equities – which currently take up 18.3% of the portfolio – performed better at 10.5%.
The only two asset classes with slight negative contributions were liquidity and Swiss equities.
To ensure the fund’s long term stability the PKBS decided to further lower the technical rate (technischer Zins/taux technique) it applies to active members’ accrued capital.
From 2019 it will be brought down from currently 3% to 2.5%, increasing liabilities by around 5%.
However, the PKBS noted that, given the current funding level of 103.8%, “only few recovery measures will have to be taken” to minimize future pension cuts.
Along with the technical rate the fund also has to lower the overall conversion rate (“Umwandlungssatz”) from 5.8% to 5.4%.
The PKBS said it was “reacting to the record-low in the interest rate level” and it was following a general trend among Swiss pension funds.
The decision also cast light on the perceived shortcomings of the pending reform of the pension system, the Altersvorsorge 2020, which among other things will put a lowering of the minimum conversion rate in the mandatory second pillar, from 6.8% to 6%, to a public vote in September.