Returns on investments of Swiss pension funds have continued to recover since the start of the COVID-19 pandemic in early 2020 to reach 7.1% in August 2021, according to the latest risk check-up study published by Complementa.
Swiss Pensionskassen recorded 4.5% returns in 2020, which added up to 7.1% this year, bringing total yields on investments of 11.6% during the pandemic period, higher than the 10.7% recorded in 2019, Complementa said.
The funding ratio rose from 110.2% in 2020 to 116.3% this year, the highest level in 20 years. Complementa estimates that Swiss pension funds need to generate a return of at least 2.1% to keep the funding ratio at a constant level.
Pension funds can achieve that level of returns also with the current mix of investments, it added. The schemes’ investment allocation is split into equities (31.2%), real estate (20%), alternative investments (9.4%), fixed income (34.2%), liquidity funds (4.5%), and the rermainder is invested in mixed funds, as of 2020.
Almost half of total assets (49%) in the second pillar system are invested abroad, largely hedging currency risks. The foreign currency risk is currently 18.4%, according to the study.
Pension funds have reduced the share of bonds in their portfolios over the past 10 years, from around 48% held in fixed income in 2010 to 38.7% last year.
Complementa believes the change made to the regulation for occupational pensions BVV 2, approved by the Federal Council last year, might push allocations in infrastructure, which stood at 1.4% in 2020.
Under the new law, infrastructure is categorised as a stand alone asset class, split from hedge funds, private equity, insurance linked securities and commodities, with an investment limit of up to 10%, compared with a previous barrier for investments in alternatives, including infrastructure, of 15%.
Swiss Pensionskassen have applied a 1.8% interest rate on saved pension assets in 2020, well above the minimum interest rate of 1.0% set by the Federal Council.
Pension funds cut the technical interest rate by 0.1 percentage points to 1.8%. The conversion rate used to calculate pension pay-outs was also reduced further to fend off risks caused by low interest rates and increasing life expectancy.
On average, the conversion rate stands at 5.50% in 2021, almost 0.1 percentage points lower compared with the prior year. Pension funds are thus moving further away from the minimum conversion rate of 6.8% in the second pillar.
Swiss schemes have already decided to cut the conversion rate for the next five years, to 5.22% by 2026. The reform of the second pillar system foresees a reduction of the conversion rate to 6%.
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