SWITZERLAND - Swiss pension funds, with a "barely acceptable" 4.2% return in 2004, have no reason to relax, according to the Swiss pension fund association (ASIP) and Watson Wyatt.

In a survey covering 71 pension funds with total assets of CHF131bn (€84.3bn), or one quarter of the Swiss pension market, the two organisations said the funds' 2004 results were "barely satisfactory".

The 2004 result follow “very poor results" in the 2000-2002 period and an encouraging 2003.

“The situation remains strained due to the low level of market fluctuation reserves many funds have," said Watson Wyatt and ASIP, which scrutinised 600 internally and externally managed portfolios.

On average, pension funds achieved their equity benchmark return targets with Swiss shares returning 6.3% and foreign shares 5.4%.

The difference between the best and the poorest return for Swiss shares amounts to 5.1% and 7.6% for foreign shares.

Institutional investors face a dilemma about their allocation to bond investments, which for more than three-quarters of the polled funds only meant a below-benchmark performance last year.

Funds will have to decide whether continue with their current strategy or seek "other investment opportunities", the survey prompts.

"In anticipation of rising interest rates, many institutional investors reduced the average term to maturity of their bond portfolios," the two groups added.

A Watson Wyatt spokesman told IPE that the survey did not specifically mean to suggest the use of hedge funds. He confirmed that pension funds had better think about their bonds allocation, scanning the whole bonds spectrum or considering "good value" equity solutions

ASIP's manager, Hanspeter Konrad, also said it was not necessarily about hedge funds. Each pension fund should make up its own mind, considering the know-how-costs.
Foreign currency bonds achieved a performance of 1.7%, which was mainly due to the fall in the value of the US dollar.

Average asset allocation to hedge funds, considered for the first time by the survey, is 2.1%. Swiss pension funds are obliged by law to return at least 2.5% up from 2.25% in 2004.