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Cash flows in Swiss pension fund market to turn negative in 2043 – report

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Net cash flows into the Swiss pension fund market will fall by around CHF20bn (€18bn) and become marginally negative over the next 25 years solely because of demographic changes, according to projections from Credit Suisse.

As a result, some pension funds could see their liquidity requirements increase, which would also have a negative impact on investment behaviour, a report from the bank warned.

The report’s authors – Jan Schüpbach, senior economist, and Livio Fischbach, strategic advisor for pension funds, both at Credit Suisse – pointed out that while net cash flows into Swiss pension funds are still positive at present, they will be negative from 2043, taking into account the contributions of both employers and insured, as well as pensions and capital benefits.

“On the one hand, inflows from retirement credits will continue to grow only slightly until 2045, due to the population increase of 300,000 people between the ages of 25 and 65,” said the authors. “Pension benefits, on the other hand, will increase significantly, as the number of people of retirement age will grow from 1.5 million to 2.7 million.”

Net inflows would fall from CHF18.8bn in 2015 to CHF15.5bn in 2025, and then in 2045 there would be net outflows of CHF2.3bn, and -CHF9.1bn in 2065.

This will increase the proportion of retirees’ pension capital in relation to that of active members: today, it stands at around 45%, but this figure will have risen to 57% by 2045, according to the projections. This will in turn reduce the funds’ risk capacity, as investment horizons become shorter.

If absorbing the additional potential for returns, though desirable, increasingly comes into conflict with pension funds’ falling risk capacity, the current shift in pension fund asset allocation from bonds towards equities and real estate investments could slow in the future, said the authors.

However, they said the results of the projections also demonstrated that the average extent of the changes should be bearable, and that a similar exposure to high-yield investment as at present could be maintained in the investment strategy.

From 1900 to 2019, Swiss equities yielded 3.7% per annum more than Swiss franc money market investments, and 2.1% more than Swiss franc bonds, they noted.

“It should still be possible for most funds to fund a substantial proportion of their pension benefits via the capital market,” they concluded. “To ensure this is the case, a regular check of the individual investment situation, for example through an asset-liability analysis, is becoming increasingly important.”

The study can be found here

IPE’s November issue will feature pensions in Switzerland

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