Compenswiss, the public institution managing the first pillar social security funds AHV, IV and EO, is warning that the positive returns of 5.28% achieved last year is not enough to secure the financing of the AHV and IV funds.
The gap between income and costs is widening every year, it said in a statement presenting 2021 results, adding that the cause for this gap is due to an aging population and as such the financial stability of both funds remains at risk.
Last year Compenswiss retuned 5.28% net, slightly above the 5.22% achieved the prior year, while assets under management rose to CHF40.88bn (€39bn) in 2021 from CHF38.54bn in 2020, as anticipated by chair Manuel Leuthold earlier this year.
The net return on cash and cash equivalents stood at -0.33% against a -0.09% at the end of 2020. Particularly equities (3.85%) and real estate (1.13%) pushed performance up.
The AHV fund returned 4.94% last year, against a 4.05% the prior year, on CHF35.91bn in assets; the IV fund recorded a 4.10% return last year, against a 4.29% at the end of 2020 on CHF3.57bn in assets; and the EO fund 5.50% last year against a 4.34% the prior on CHF1.39bn in assets.
Commenting on the funds’ performances, managing director Eric Breval said: “The difference between the performance of the [overall] portfolio (5.28%) and that of the three social security funds can be explained by the liquid assets held by the funds, which dilute the performance. This was particularly pronounced for the IV fund because we had added liquidity reserve due to the high outflows.”
For 2020 Compenswiss expects an imbalance between income and costs for the AHV fund, CHF10bn in debt for the IV fund and a stable financial situation for the EO fund, it said.
It allocates 38.5% of its assets to fixed income in foreign currency, 16.5% in fixed income in Swiss francs and loans, 26.2% in equities, 13.4% in real estate, 3.1% in precious metals, and 2.4% is allocated to money market investments, as of the end of December last year.
It manages 55% of its assets internally and 45% externally, with 49 mandates, including 32 active and 17 passive. The biggest mandate is a CHF4bn Swiss bonds brief while the smallest is a CHF197m Pacific region ex-Japan equities mandate.
Migros lifts funding ratio
Migros Pensionskasse, the pension fund for the Swiss retailer, has seen its funding ratio increase by 12 percentage points last year to 133.9%.
The pension fund achieved returns on investment of 8.5% in 2021, driven in particular by equity and real estate investments. The broad diversification of its portfolio and its sustainable investment policy have also had a positive impact on the fund’s risk/return ratio, it said.
Equities topped returns among all asset classes last year with 18.9%, and real estate also made its positive contribution to its overall performance returning 9.4%.
Assets under management increased by CHF2.2bn to CHF29.7bn, including 34.6% nominal values assets, 28.7% and 34.8% in equities and real estate investments, respectively, and 1.9% of assets is invested in gold.
The number of members in the fund increased by 1,000 last year to 81,000, including 29,300 pensioners, up from 28,900 in 2020.
Second pillar reform faces headwinds
The Swiss insurance association (SIA) has partially distanced itself from the reform of the second pillar pension system which was approved by the national council, the lower house of parliament, last December.
Markus Leibundgut, member of the managing board at SIA and chief executive officer of Swiss Life Switzerland, said in a paper that the main goal of the reform – meaning the financial stability of the occupational pension system as a whole – could only be achieved by funding the compensations for the reduction of the conversion rate used to calculate pension pay-outs through the Guarantee Fund Sicherheitsfonds BVG, an institution whose main task is to secure the benefits of members in case of a pension fund’s insolvency.
The second pillar reform foresees the reduction of the conversion rate from 6.8 to 6%. According to the National Council, the Pensionskassen would instead finance the compensatory measures for the reduction of the conversion rate, spread over a period of 15 years, in a decentralised system.
The funding from the Guarantee Fund to finance individual members would be kept to a minimum, the CEO said.
As a result, pension schemes would have to finance higher benefit obligations than before from their own funds, and this means that the internal redistribution mechanism from active members to retirees is increased within the occupational pension schemes instead of decreasing, Leibundgut said.
Pension schemes’ situations will thus deteriorate further, and the main goal of the reform – stabilising occupational pensions financially – will be missed, the CEO concluded.
SVV is also recommending applying the compensatory measure over a period of 20 instead of 15 years.