Satellites in orbit
Christoph Ryter, CEO of the Swiss retail group Migros’ Pensionkasse, explains his fund’s diversification strategy to Nina Röhrbein
What Switzerland lacks in land mass, it makes up for with its sheer quantity of pension funds.
The number stands at around 2,200 – although only 5% have assets under management of over CHF1bn (€811m).
And just like in other countries, the Swiss pension fund landscape is changing from DB (Leistungsprimat) to DC (Beitragsprimat). Only 8% of all pension funds today still offer DB benefits for old-age pensions.
This is why the pension fund of Switzerland’s largest retailer, Migros, stands out in the Swiss pensions landscape. For one, it is a DB scheme still open to new members and secondly, with over CHF18bn (€14.5bn) in invested assets, it was the sixth largest fund in Switzerland in 2012, according to IPE’s Top 1000 European pension funds survey.
In total, Migros-Pensionskasse provides a pension for 43 retail, industry and service companies belonging to the Migros group. In typical Swiss fashion, employees who have joined the pension fund recently and consequently cannot accrue the maximum number of years of service have the opportunity to buy tax-exempt, additional insurance years in their active, contributing years.
The overall investment strategy of Migros-Pensionskasse comprises 40% fixed income, 30% equities and 30% real estate. In recent years, this split and the portfolio’s risk return profile has remained stable.
However, since 2010 Migros-Pensionskasse has increased its diversification and broadened its investments.
This is reflected in the 5% of satellite portfolios in each of the three categories of fixed income, equities and real estate. Their introduction three years ago came at the expense of traditional asset classes such as Swiss and foreign currency bonds.
“But these are merely dashes of colour, in other words smaller, active mandates in our overall portfolio,” says Christoph Ryter, CEO of Migros-Pensionskasse and also president of the Swiss pension fund association ASIP.
In the real estate portfolio, satellites are international, non-listed real estate funds and infrastructure, while satellites in the equity portfolio can include commodities, private equity, hedge funds and small and mid-cap equities.
High yield, inflation-linked, emerging markets and convertible bonds as well as senior loans fall under the satellite category in fixed income.
To optimise the portfolio in search of higher yields, the pension fund, like many in the country and elsewhere, has also bought more corporate bonds – both Swiss and foreign – at the expense of government bonds.
“However, despite 10-year Swiss government bonds yielding only 0.6%, we want to retain some exposure to bonds,” says Ryter. “In real estate, for example, attractive investment opportunities are limited, while for volatility reasons, we cannot solely invest in equities. In short, despite their low yield, bonds are crucial to the risk management of our portfolio.”
For 2013, overall exposure to Swiss and foreign government bonds stands at 5%, whereas 20% is invested in Swiss and foreign corporate bonds.
At present, the pension fund holds a shorter duration in its bond portfolios compared to the benchmark and is reviewing all bond positions.
Local to global
Most of the pension fund’s exposure in the foreign bond portfolios is to euro, US, Canadian and Australian dollar. The euro exposure in the bond portfolio has been stable despite the turmoil of the euro crisis.
The pension fund’s 30% equities portfolio is global. The majority – 17% – is allocated to global equities, while 8% is invested in domestic equities and 5% in equity satellites. The benchmark for the foreign equity portfolios is the MSCI All Country World total return gross ex-Switzerland index – however the portfolios differ in terms of their weightings to Europe, the US and the Far East.
The shift from domestic to international equities began in Switzerland several years ago.
“International diversification began in the bond market before it moved into the equity markets in the 1990s,” says Ryter. “Diversification in real estate is a more recent phenomenon.”
All allocations have to remain within fixed asset class bandwidths set by the investment committee. Should they exceed the upper or lower limit of their respective range, their portfolio manager will need to adjust it or in exceptional circumstances justify it.
A tactical asset allocation strategy is agreed on an annual basis, while asset-liability studies take place every four years, with the last one taking place prior to the internal investment regulation review (Anlagereglement) in 2012.
Currency plays a key role in Migros-Pensionskasse’s asset allocation.
Foreign currency risks are hedged in line with the pension fund’s risk management strategy.
However, after the Swiss National Bank (SNB) introduced a temporary floor of 1.20 to the CHF/€ exchange rate in September 2011 as the euro crisis weighed down on the Swiss franc, it reduced its euro hedges in the wake of the decision.
“The more the exchange rate deviates from the 1.20 floor, the more likely we are to hedge according to our strategic allocation,” says Ryter. “With the exception of the euro, we hedge all foreign exchange risks in our bond portfolios.”
In equities, foreign currency exposure is only partially hedged.
Due to the low volatility environment, the pension fund does not hedge its interest rates.
“Because we are a DB scheme and aim to offer high benefits at low costs, the de-risking that went on at other pension funds is not suitable for us although we do practice asset liability management,” says Ryter. “Our broad 40/30/30 asset allocation split signals that we want to generate returns and not only control the risks.”
Unlike other Swiss pension funds, the vast majority of the investments around 85%, are managed in-house. This includes the management of the Swiss real estate portfolio, 75% of which consists of residential properties. The combined 15% of satellite investments on the other hand are mainly outsourced to external partners.
The performance analysis and compliance reporting is also undertaken by an external partner, while an internal team is responsible for the selection of external managers and risk management.
Benefits under review
The expected return for Migros-Pensionskasse is 3.6%, which is adjusted annually. The pension fund needs to achieve a minimum rate of return of 3.3% to maintain the current funding level of 115.8% as at the end of 2012
“We review our pension promise approximately every four years,” says Ryter. “This is partly driven by Swiss legislation and partly by the market environment. The investment side is reviewed much more frequently, although the board of trustees [Stiftungsrat] has generally been satisfied with the basic risk-return profile and felt little risk appetite to invest more aggressively. But the challenging market environment had to be reflected in our pension promise. This left the pension fund with little option other than to increase contributions – which for competition reasons is restricted – or to adjust the pension benefits.”
So while, when Migros-Pensionskasse adjusted its pension promise as of January 2012, it maintained the same contributions, slightly reduced the benefits and raised the regular pensions age by one year to 64 years. This enabled the pension fund in turn to lower the mandatory minimum target return to 3.3%.
“We always aim for a good mix of measures to ensure the long-term financial stability of the fund,” says Ryter.
The last revision of the pension promise before 2012 took place in 2008, while the one prior to that was in 2005.
The risk potential of the overall broad asset allocation of Migros-Pensionskasse is set at 7.1%, while the target size of the fluctuation reserve is 19% .
“After the completion of several internal projects, we now need a consolidation phase,” says Ryter. “In addition to the review of the benefit plan, we have implemented a new IT system for the entire member administration, restructured the insurance administration department and reorganised the back office of the asset management department.”