Compenswiss, the public institution managing Switzerland’s first pillar social security funds AHV, IV and EO, chose to remain invested in equities at the peak of the pandemic last year, a decision that led to “fully benefit” from the following stock market recovery, Manuel Leuthold, the chair of the institution, said in an interview with national paper Handelszeitung.
Leuthold added that at its lowest point, at the end of March, Compenswiss returned -10% for the entire portfolio.
The fund benefited from the use of “hedging instruments”, he said, adding that the vigorous rebound was surprising with central banks massively contributing to it. Central banks have since boosted liquidity and pushed for lower bond yields in a move to reduce risk and loosen up tight markets.
The banks of Canada, England, Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank coordinated action to provide liquidity through the standing US dollar liquidity swap line arrangements. The swap lines among the central banks served at the time as liquidity backstop to ease strains in global funding markets, and mitigate the effects on the supply of credit to households and businesses.
Last March Eric Breval, managing director at Compenswiss, told IPE the fund had sufficient liquidity, “a lot of cash”, to fend off the consequences of the crisis in the short term, but remained cautious for the future if the crisis would continue.
Compenswiss typically adopts a cautious investment strategy, with two thirds of its assets invested in fixed income. Over the past few years, it has increased its share of indirect real estate assets – domestic and foreign – to 10%.
However, Leuthold is “not convinced that now is the right time to invest heavily in the Swiss real estate market,” as prices have been very high for a few years.
Compenswiss manages the first pillar compensation funds for loss of income for old age and survivors (AHV), disability insurance (IV), and the EO fund, which provides compensation for people in the military and civil services, for maternity, and, from 2021, paternity leave as well.
Blackrock, Barings and State Street manage the three funds’ assets, Leuthold said, adding that Compenswiss is “always looking for the best asset managers who have broad experience and a solid track record of several years”.
Compenswiss expects returns for the three schemes to reach 3% in 2020, which in a low interest rate environment and with the current liquidity requirements the fund is under, is “already good”, Leuthold said.
Returns on investment of CHF1bn for AHV will not compensate for the deficit resulting from demographic developments, he said. Additional income of CHF2bn per year will be injected to finance the fund through the tax reform STAF.
Compenswiss expects AVH to break even for 2020, a positive result compared to a loss of CHF1.17bn recorded in 2019, according to its financial statement.
The IV fund also closed 2019 with a deficit of CHF383m, while EO ended with positive earnings of CHF53m.
AHV’s funds were expected to end by 2035 or earlier; Leuthold said the date was set before the COVID-19 crisis, but it could come earlier.
He added that it was premature to make predictions on AHV’s finances, although demographic development remains the main hurdle and a reform of the pension system is necessary.