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Swiss pension funds struggle to adjust to low-interest-rate environment

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The CHF16bn (€13bn) pension fund for federal railways in Switzerland (PKSBB) has finalised talks with members to adjust the scheme’s technical parameters.

From 2016, the scheme is to lower its discount rate (technischer Zins) from 3% to 2.5%, while the conversion rate for new members will drop from 5.8% to 5.22%, as contributions are raised.

The PKSBB will also begin using ‘generation tables’ to assess longevity risk.

Only a few months ago, the pension fund announced it would put on hold plans to introduce flexible pension payouts, after talks with its members broke down.

Managing director Markus Hübscher told IPE the recently agreed measures were a reaction to the “increasingly difficult market environment”.

Further, the PKSBB also conceded that the introduction of flexible or alternative pension models “might be necessary” in future, while not ruling out further adjustments to its recently changed parameters.

The PKSBB’s troubles are not uncommon in Switzerland.

Local consultancy ppcmetrics recently warned that adjustments to pension funds’ technical parameters, in light of the low-interest-rate environment, were effectively “inevitable”.

Ronald Schnurrenberger, managing director at the PKE, warned that possible adjustments to pension payouts would have to be made in time, “based consistently on sensible parameters”.

In 2014, his pension fund – for the Swiss energy sector – was one of the few Pensionskassen to introduce flexible payouts. 

Schnurrenberger lamented that the historically low interest rates made it very difficult to achieve sufficient returns over the medium and long term, but added that it did not matter whether returns were actually just above or just below zero.

Falling return expectations have also led to changes at the Aargauische Pensionskasse (APK).

After conducting a recent asset-liability management study, the pension fund reduced its exposure to commodities by 300 basis points to 5% for 2015.

Managing director Susanne Jäger told IPE the change had been a “logical” step given the return expectations.

She also pointed out that the new level was closer to the average of other Pensionskassen.  

The APK also made minor adjustments to its money market and liquidity exposure limit, reducing it from 5% to 3%, while slightly increasing its exposure to global bonds and Swiss equities.

A recent study by ppcmetrics identified APK as being one of the Pensionskassen where additional risk had failed to “pay off” over the long term.

The consultancy also pointed out that the Swiss National Bank’s negative interest rate for certain assets in current accounts had further “accentuated” the low-interest-rate environment.

For Swisscanto, the Bank’s move is a “further intensification of the financial repression by central banks”.

Thomas Liebi, chief economist at the asset manager, said the Bank had been compelled to respond to the continued appreciation of the Swiss Franc, triggered by the European Central Bank’s expected bond purchasing programme.

In this environment, he warned, investors will be increasingly “pushed” into longer durations and riskier investments.

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