The obligation to use mark-to-market accounting and benchmarks are “diseases in the capital market”, according to Eric Breval, director of Switzerland’s first-pillar pension fund AHV. 

Speaking at the Swiss Leadership Pensions Forum in Zurich, Breval said he was convinced that, without these two “diseases”, it would be “absolutely feasible” for a Swiss pension fund to produce an annual return of 3% in Swiss francs.

For a long-term investor, he said, volatility in bond investments “should not matter”, as long as the invested money plus interest is returned after the duration ends.

“But, with mark-to-market valuation, you see every loss and profit during the period,” he said.

However, Breval conceded that most Pensionskassen, including the AHV, could not avoid the mark-to-market approach completely.

“All we can do is diversify,” he said.

At the same event, Vera Kupper Staub, vice-president at the country’s top supervisory body OAK, detailed the institution’s plans for a new approach to assessing pension funds’ investment risk.

The OAK is looking at four different risk parameters, including funding levels, return/interest rate promises, recovery strength and investment risk.

Using those key figures, the supervisor will derive an overall picture of the second-pillar system’s health.

For the assessment, to be initiated early next year via an online questionnaire, the OAK aims to “completely overhaul” the way it considers investment risk, Kupper Staub said in her keynote speech.

“Currently, we focus more on qualitative parameters, but, from next year, we will focus on volatility risks,” she said.

This assessment will be derived from the basic portfolio information, with rough figures on allocations to basic asset classes such as bonds, equities and real estate.

“However, those Pensionskassen that voluntarily report more detailed information on their portfolios will get a more accurate risk assessment,” Kupper Staub said.

She stressed that this would not be mandatory.

She also took pains to emphasise that individual Pensionskassen should refrain from using the OAK’s risk assessment to make any strategic decisions.

“It is a view of the whole system for which we have to make simplifications, and it is no representation of the individual situation of each Pensionskasse, as each fund has to take different additional risk parameters into account,” she said.

Kupper Staub said that, on the one hand, risk in the second pillar had decreased in recent years, as capital markets had performed better.

On the other hand, she said, those pension funds with above-mandatory assets had taken advantage of their “leeway” to minimise risk and adjust technical parameters.

“But the Achilles heel of the system is its reduced ability to restructure successfully,” Kupper Staub said.

“This makes it crucial for its stability that actuarially correct parameters be applied.”

The debate surrounding the conversion rate – which is to be cut from 6.8% to 6% under the Altersvorsorge 2020 reform – is a heated one, as experts have warned that the 6% rate would be too high once the reform took effect, and that many funds had already fallen below that threshold.