Swiss pension funds are starting to feel the impact of negative interest rates on cash parked in banks, prompting reviews of existing agreements and a search for alternatives.
UBS and Zürcher Kantonalbank (ZKB) have begun applying negative rates on pension fund deposits after the Swiss National Bank (SNB) cut its key rate to zero in June.
In July, UBS informed institutional clients, including pension funds, that rates would be reduced to -0.2%, while ZKB moved to reintroduce a rate of -0.25%.
“This affects many pension funds, especially in the case of UBS, after the integration of Credit Suisse, due to the bank’s high market share,” Andreas Rothacher, head of investment research at consultancy Complementa, told IPE.
UBS and ZKB manage CHF526.5bn (€574bn) and CHF 297bn, respectively, on behalf of pension funds, according to a report published this year by the asset management association AMAS.
“In principle, investors will try to reduce their liquidity holdings and, where possible, spread them across different institutions – where there are exemption limits,” Rothacher added.
Liquidity remains essential for pension funds, which must pay pensions, receive contributions, and manage lump-sum withdrawals.
Publica, for example, holds part of its portfolio in cash, some of which is subject to negative rates, in order to ensure timely pension payments.
“We continuously review the banks’ terms and conditions. We also stagger maturities, by investing funds, for example, for one or two months in promissory notes and private placements or fixed-term deposits,” it said in a statement.
While negative rates dent returns on cash holdings, the effect is limited at portfolio level given broad diversification.
“However, the low interest rates at the short end of the curve pull the entire yield curve downward, which has a negative impact on return expectations for bonds. This is more significant than the zero interest rates on assets held in banks,” Publica said.
As a result, the fund has increased allocations to real assets while cutting back on bonds.
The pension funds association ASIP has urged members to review liquidity management and take precautionary steps with banks, including negotiating exemption limits and tiered rates.
“Looking for new relationships with banks is certainly an option. However, pension funds have rating requirements for counter-parties in their regulations, meaning they cannot hold their money with every bank,” Rothacher noted.
He added that while renegotiating interest rates with asset managers may be possible, the chances of success are slim, particularly for smaller clients.
The latest digital edition of IPE’s magazine is now available
