SWITZERLAND – More than 60% of Swiss pension funds responding to a Complementa survey worry they will fail to achieve the legal minimum return in the near future.
In spite of this, the BVG commission advising the government on the second pillar has recommended slightly increasing the legal minimum return for Pensionskassen from 1.5% to 1.75% for next year.
In recent years, the government has followed the BVG commission’s recommendations almost without exception.
Under the most recent reform proposals, however, the rate might be set at the end of a year based on actual return rather than forecasts.
Peter Zanella, head of retirement solutions at Towers Watson in Zurich, told IPE: “For me, this is a purely politically motivated decision.”
He added that the 1.75% target would mean the minimum interest rate was 50 basis points higher than the return of a 10-year Swiss government bond.
“In other words, Pensionskassen would have to take higher risks – i.e. equity exposures – to achieve the minimum return, which is especially challenging for underfunded Pensionskasse,” he said.
He warned that higher risk-taking also increased the danger of widening the funding gap in a market correction.
Zanella called the proposed increase a “bet” that the returns of this year would continue in future.
“But, given the current situation of the world and the markets, this is more than doubtful,” he added.
For the first six months of 2013, Swiss Pensionskassen generated an average 3.8% return.
But, according to Complementa’s latest Risk Check-Up, 64% fear they will fail to generate the necessary return in the ongoing low interest-rate environment.
For 2012, the consultancy also noted a change in fixed income portfolios as pension funds aimed to generate higher returns.
Almost 45% decreased their exposure to government bonds, and higher inflows were reported to all other fixed income strategies apart from covered bonds.
Complementa’s survey showed that 47% of respondents increased their exposure to corporate bonds, 16% to emerging market bonds and 10% to high-yield bonds.
Andreas Niedermann, head of the Risk Check-Up team, said the trend of portfolio restructuring would continue into 2013, “but not as pronounced as last year”.
Pensionskassen also shifted some assets from bonds into equities, upping equity exposure from 26% to 29% – an increase “only half of which can be explained by market performance”, Complementa said.