Large Swiss pension funds are set to benefit from proposed rule changes allowing the use of repo transactions to hedge currency risk and manage liquidity more efficiently.
The Swiss government has launched a consultation to amend occupational pension regulations (BVV 2) to permit repo transactions for the first time. Currently, such transactions are banned because of their leveraged nature and associated risks.
The Federal Social Insurance Office (FSIO), in its consultation report, stressed that the ban had proven effective during financial crises and contributed to the stability of the country’s pension funds. The government now plans to lift restrictions but impose limits.
Under the proposals, repo transactions for liquidity management would be capped at 1% of a pension fund’s assets, while those for currency hedging would be limited to 4%.
Publica, the CHF42.5bn (€45.5bn) federal pension fund, welcomed the draft regulation.
“This arrangement would enable us to manage our liquidity needs more efficiently, for example, by enabling us to obtain short-term liquidity more cost-effectively and requiring less liquidity,” said deputy chief investment officer Patrick Uelfeti.
A lower liquidity share, he added, would allow Publica to invest freed-up assets in higher-yielding investments.
Lukas Riesen, partner at PCCmetrics, said the changes could simplify operations, particularly liquidity management, and lower transaction costs depending on a fund’s operational setup.
“Only a few large pension funds are expected to consider using this tool. The complexity and associated risk management requirements increase in general,” he said, adding that strategic leverage remains prohibited, meaning no impact on long-term investment strategies.
Consultancy Complementa also expects larger funds to benefit from the new tool, at least in the initial stages.
Head of investment research Andreas Rothacher said the decision to use repos will depend partly on the extent to which costs can be reduced.
“If cost reduction is achievable, liquidity levels could decline. However, pension funds implement currency hedging in various ways. The effects will vary depending on whether a pension fund hedges directly, overlays with a specialised manager, or uses currency-hedged fund tranches/share classes,” he explained.
Rothacher added that lower costs could make currency-hedged asset classes more attractive in an asset/liability management (ALM) context, though not to the extent of significantly boosting allocations to fixed income.
Adriano Sbriglio, head of asset management at the CHF13.5bn Aargauische Pensionskasse (APK), believes the changes would strengthen funds’ ability to act and reduce liquidity risks.
“This is unlikely to have a significant impact on [a pension fund’s] strategic considerations. However, given the additional options available, operational processes could be expanded and further optimised if necessary,” he said.
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