A partner at Swiss consultancy c-alm has cautioned that recent supervisory guidance could trigger “cyclical adjustments” to pension funds’ funding ratios and encourage pro-cyclical investment behaviour.
Roger Baumann said recommendations issued in December by Switzerland’s occupational pension supervisor, Oberaufsichtskommission Berufliche Vorsorge (OAK BV), blur the lines between risk oversight and investment policy.
The regulator recommended the use of key figures – including funding ratios, the difference between expected and target returns, and risk tolerance based on stress tests of asset classes – to assess financial risks.
Under the proposed approach, a negative performance resulting from asset class stress tests is compared with the sum of the structural risk capacity and the overfunding, measured via the economic funding ratio, which incorporates a risk-adjusted valuation of future cash flows.
According to OAK BV, to avoid pro-cyclical investment decisions and assessments of key figures after a negative investment year, overfunded pension funds should increase the economic funding ratio by the amount of the value fluctuation reserve used to absorb volatility, reduced by the negative performance.
Baumann argued that this “cyclical adjustment” illustrates how the supervisory authority conflates risk oversight with investment policy.
“I understand that the financial situation is relevant from a purely risk perspective. When it comes to managing investment risks, [however] a pro-cyclical approach is fundamentally unsustainable,” he told IPE.
He added that while the supervisor should assess the financial position of pension funds, responsibility for managing investment risks rests with boards of trustees.
Baumann also criticised the timing of the proposed key risk tolerance metric. The indicator would not apply in the year a pension fund falls into underfunding, despite the deterioration in its risk position, but only in the following year – even if the funding ratio and overall financial situation have already improved.
“From a risk perspective, this makes no sense. This key figure is designed to prevent the pension fund from feeling compelled to reduce its investment risk in the first year, knowing that such a reduction would be unsustainable,” he added.
KPIs as a filter, not a decision tool
Baumann said a systematic assessment of financial risks using key performance indicators (KPIs) is sensible, provided they are used as a filter rather than a mechanistic trigger.
“Key performance indicators must necessarily be quantitative. This automatically gives the funding ratio too much weight, but important qualitative criteria, such as the stability of the employer environment, cannot be included in a quantitative framework,” he said.
He also stressed that risk tolerance cannot be defined in absolute terms.
“Even a severely underfunded pension fund can be risk-tolerant, while there are also pension funds with a high funding ratio that would be better off taking on less investment risk,” Baumann said, highlighting concerns raised by the supervisor’s recommendations.
