Swiss pension funds have fared well to market shocks caused by the COVID-19 pandemic in the first half of 2020, according to the Swisscanto Pensionskassenstudie 2020.
Funding ratios rose to 110% at the end of H1, up 10 percentage points from the peak of the pandemic in March, but still down from 113.9% at the end of 2019.
A study conducted by Swisscanto, based on data of 520 pension funds with total assets worth CHF772bn (€710.6bn), noted that the current funding ratio scenario is only a snapshot.
The essential element to finance the second pillar pension system in the long term is the ability for pension funds to make returns on assets through active investment strategies, it said. Generating returns in the long run remains a major challenge, it said.
The proportion of funds impacted by the negative interest rate regime imposed by the the Swiss National Bank has risen steadily from 58% to 73% since 2016.
The share of pension funds with technical interest rates below 2% continues to increase – 58% for private funds and 49% for public pension institutions –up from 4% in 2016.
Swiss pension funds increased investments in equities and reduced allocations in bonds in 2019. Around 31.6% of assets were allocated to equities (up from 29.3% the prior year) and 29.3% for bonds (down from 30.9% in 2018). Real assets also saw investments worth 24.3%, while 1.4% went to mortgages, 6.4% to alternatives, 5.5% to liquid funds, 0.5% to loans and 0.9% to other asset classes.
Pension funds achieved on average returns of 10.85% in 2019. The pension funds with the best performance have achieved an annual return of 5.4% over the past five years.
Swisscanto stressed the necessity of a rapid reform of the second pillar system with a particular focus on the immediate reduction of the minimum conversion rate – Mindestumwandlungssatz – from 6.8% to 5.8%.
The average conversion rate continues to fall, however, from 6.74% in 2010 to 5.63% in 2020.
Swisscanto expects the number of pension funds to continue to decrease. This development is associated with a profound change of occupational pension provisions, with traditionally close ties between companies and pension funds disappearing.
The number of Pensionskassen are expected to fall in 2026 to around 1,000 from 1,562 in 2018, according to pension supervisor OAK BV.