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Farewell 4%

The most talked-about issue in the Swiss market has been the 4% guaranteed rate of return for occupational pension plans. The debate, which has been active in the market for some time, has recently become louder than ever, especially since negative absolute returns have made it almost impossible to achieve this target. The rate, established in 1985, has been widely criticised by the asset management community – especially insurance companies, which in some cases have even been forced to pull out of the pensions business for not being able to meet this requirement.
In a move that some described as being designed to please the financial community, in particular the insurers, the federal government decided in July to lower the rate from 4% to 3% to try and stop the depletion of pension fund reserves. The Swiss Pension Fund Association (ASIP) described this measure as “over-hasty and inappropriate” and criticised the government for changing the interest rate in such a manner and at such short notice, instead of waiting for a report on the issue that the federal office for social security is expected to release some time this autumn. The Swiss Chamber of Pension Fund Experts has also expressed surprise at the government's decision, saying it considered that both the level of the reduction and its timing should be decided only after consulting the professional associations.
Both pension funds and asset managers have long been asking the government to review this legal constraint and make it more flexible, more in line with the long-term nature of pension funds and less focused on short-term considerations.
It remains to be seen whether the government’s decision will solve any of the funding problems of Swiss pension funds, but this debate is only one of the many issues being discussed in the market at present.
The solid Swiss pension fund industry has suffered the effects of the disappointing market performance as much as its European counterparts. At the end of 2001 Swiss pension funds registered an average performance of -7% and concerns about shrinking reserves are now stronger than ever. With these figures in mind it is easy to understand why the 4% issue has been at the top of the agenda, but pension fund boards know that any changes in the legal framework have to be accompanied by changes in investment strategies.
In general, pension fund sponsors are dissatisfied with the work of their money managers and are undertaking in-depth revisions of their approach to investment. For some, changes in the asset allocation of their portfolios and, in some cases, changing providers could become inevitable.
However, there have not been any signs of major moves away from equities among Swiss pension funds. On the contrary, a recent survey of Swiss pension funds by Robeco, Bilanz and Prevoyance Professionnelle Suisse showed that pension funds are still increasing their exposure to equities, with the fixed income proportion remaining stable.
The same report also highlights the increasing interest among investors in new asset classes to ensure high returns in volatile markets. This has translated into a move from balanced to specialist mandates, especially significant among larger funds.
This also allowed the penetration of alternative asset classes into institutional portfolios, although the proportion of assets being invested this way is still not significant. Some believe that pension funds’ interest in alternatives stems from desperation rather than a real understanding of these products. Whatever the reasons for this trend, we have recently seen good examples of Swiss pension funds following the alternative route. In July, the pension fund for teachers in the canton of Berne, BVLK, with assets of Sfr4.6bn, announced its intention to allocate 3% of its assets to hedge funds to help it achieve its long-term goal of 6.6% returns and make up for the poor overall performance in 2001.



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