SWITZERLAND – The continued downward trend in global equity markets could yet have far-reaching consequences for the asset allocation strategy of many Swiss pension funds, since their portfolios traditionally have large equity components, and the median annualised performance target for many of them has fallen below the government’s 4% minimum, says InterSec Research in Zurich.

William Libby, a director at InterSec says that while most pension funds are probably not contemplating any changes to their asset allocation policies yet, this could become inevitable if there is a turnaround soon.

“This is the first time we’ve seen the annualised returns dip below the 4% minimum level for four years, which means that the pension funds themselves will have to start using their own reserves to fund their payments if they can’t make up that 4%. So the impact of such a fall is clear to see. Most appear to be sticking to their guns and riding the storm but they won’t be able to do that forever,” he says.

Libby says that he was surprised not to see Swiss pension funds begin to make changes to their asset allocation strategies a couple of years back, given their conservative nature. “The pension funds here took a bit of battering in 2000, and I expected to see them react by protecting themselves against further onslaughts by moving their assets out of equities,” he says.

The decline in returns goes back to 2000 and ironically, the fourth quarter last year was the only period that saw gains, according to InterSec “Everyone thought that the continued slump last year as a whole was exacerbated by the events of September 11. This, coupled with the SwissAir debacle, did lead to a lot of debate about asset allocation strategies here in Switzerland. So it was odd to see the fourth quarter actually post 4% gains in equity returns, the only quarter last year to do so,” Libby comments.

Libby suggests that analysts who had said the declines were market driven and that the markets could contain the exceptional events of the latter part of 2001, were right. “ Many thought that they were trying to prevent panic and further falls, when in fact they were right all along.”