Publica, Switzerland’s CHF37bn (€30bn) public pension fund, returned less than 6% last year and attributed its underperformance against the national average to its foreign-currency hedging.

On average, Swiss pension funds returned 8% last year, according to Credit Suisse, UBS and Swisscanto, while Towers Watson’s estimate – based on ASIP members’ asset allocations – was even higher at 10%.

In a statement, Publica said its return would have been 8.9% were it not for its policy of hedging all developed nations’ currencies in the portfolio.

It was precisely this hedge, it said, that allowed the pension fund to avoid major losses in the wake of the Swiss National Bank’s decision two weeks ago to stop pegging the Swiss franc to the euro.

Publica said its foreign-currency hedge had also helped eliminate “non-systematic and therefore unpaid” risks.

Deputy chief executive Stefan Beiner told IPE that Publica introduced a policy last year aiming to make maximum and minimum hedging on EUR and USD more flexible.

“We are regularly reviewing whether, for tactical reasons, the hedge on dollar and euro investments should be lowered from 100% to 80% at the most, or not,” he said.

Swiss consultancy c-alm, in its most recent research newsletter, warned that the cost of foreign-currency hedging had “literally exploded over the past week”, reducing returns measured in USD by as much as 3%.

According to c-alm research, a hedged USD Treasury portfolio would now return -2.64% after costs.

The consultancy said pension funds would have to decide whether it “made sense” to stick with their hedging strategies in such extreme market conditions.

It also warned that “major fluctuations” in hedging costs had made strategy reviews increasingly difficult.

Publica, addressing its 2014 returns, also cited the harmful effect of its 2% exposure to energy commodities – comprising crude oil, fuel oil and petrol – which returned -28.9%, knocking another 110 basis points off its overall performance.

The main performance drivers were bonds and equities, while real estate also contributed 250bps of return.

Overall, the portfolios of the 21 member organisations in the Publica collective scheme reported an average funding level at year-end 2014 of 105%, compared with 104.1% at the end of the previous year.

According to Swisscanto, the average funding level in its sample of public pension funds aiming for full funding stood at 106.2%, a 550 basis point increase on 2013.

For all other funds, the asset manager calculated an average funding level of 115.6% (+56bps), its highest level since 2004, Swisscanto said.

For more on Publica, have a look at Carlo Svaluto Moreolo’s On The Record interview from the December issue of IPE magazine