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Asset Allocation: Ticino maintains aim

Pierre Spocci, director of the Istituto di Previdenza del Cantone Ticino, tells Carlo Svaluto Moreolo about the pension fund’s stable strategy 

At a glance

• Pension fund for employees of the Ticino Canton
• Assets (end 2015): CHF4.54bn (€4.18bn)
• Coverage ratio (end 2015): 67.3%
• Location: Bellinzona
• Director: Pierre Spocci
• Strategy: 61% fixed income, 24% equities, 15% real estate; mainly passive

Many Swiss pension funds are said to be ill-equipped to face the challenges posed by low interest rates. They lack the ability to restructure their portfolios, which are often biased towards ‘balanced’ strategies. 

A balanced, relatively conservative strategy is currently doing the job for the Istituto di Previdenza del Cantone Ticino (IPCT), a public pension fund from Ticino, the Italian-speaking canton of Switzerland. The pension fund provides benefits to around 23,300 employees of the Ticino Canton and affiliated organisations. It had about CHF4.54bn (€4.18bn) of assets at the end of 2015. At present, IPCT has a strategic allocation of 61% to fixed income, 24% in equities and 15% in real estate. The actual allocation can fluctuate from the strategic model, according to predefined bandwidth. 

In recent years, the strategy has suited the pension fund well performance-wise. The only negative years were 2001 (-0.35%), 2002 (-2.86%) and 2009 (-9.28%). Cumulative performance since 2001 is above 50%, with an average annual return of 3.6%. In the first nine months of 2016, the fund has gained 3.73%, only slightly below its benchmark.

The strategy was amended in 2015, on the back of the latest triennial asset liability management (ALM) study. Pierre Spocci, director of the IPCT, explains that the fund diversified away from the domestic market in both its equities and fixed income portfolio.  

At the time, the fund added a small cap allocation (2.6%) and a corporate credit allocation (5%), both of which were new. It also hedged the currency risk attached to the equity portfolio. The fund now hedges most of its currency risk, with only 7.5% of the risk remaining unhedged. 

“We moved into these new asset classes to find more return while keeping the risk in check. We also needed to diversify away from Switzerland. But the main problem at the moment is finding return”, says Spocci. 

ipcts asset allocation end 2015

Most of the portfolio is passively managed by Credit Suisse and UBS. The strategic choice to do without active management was a key one for the fund. It was based on a general dissatisfaction with the performances recorded by its active managers at the time. 

Spocci says: “The active mandates we had were underperforming their benchmarks. We had four large balanced mandates, which were gradually transformed into passive ones. For a while, we kept two active mandates as satellites, one focused on emerging markets and one on Swiss mid and small cap equities. In the end we closed those as well. The process was completed almost 10 years ago.” 

Today, adds Spocci, the fund feels more comfortable with investing in index-tracking funds. 

“We prefer to maintain a long-term relationship with our managers, rather than chasing the managers that performed well the previous year.”

At the moment, there is little to be gained for the fund from focusing heavily on manager selection. Internally, the fund has little capacity for strategic investment decisions. Building internal investment management capacity is not IPCT’s plan at the moment, although Spocci admits that in general, pension funds may benefit from building internal resources.

For the foreseeable future, however, IPCT outsources the strategic asset allocation and manager selection to PPCmetrics. Spocci says that the consultant emphasises the importance of building a correct strategic model over manager selection. 

There is, however, an internal team that specialises in real estate investment. At the end of 2015, the allocation to real estate was below the 15% strategic target. Direct property investments, mainly consisting of Swiss residential, were 7.2% of the overall portfolio. A further 3.7% was allocated in non-listed real estate funds. For the time being the fund invests only domestically. 

The overall strategy may change in the next few years, says Spocci, based on the results of the upcoming ALM study. But the fund will likely maintain its focus on simplicity, implementing the strategic asset allocation via passive products.

The coverage ratio, which stood at 67.3% at the end of 2015, is relatively low compared to other pension funds in the country. But the figure is comparable to IPCT’s peers in the public sector. Spocci says that the ratio was about 100% until a few decades ago. Demographic imbalances, overly generous pension promises and declining interest rates have contributed to the decline.

In the early 2000s, according to the director, the federal government started addressing the problem. A step forward was taken in 2010, when a new law on occupational pensions established that public pension funds such as IPCT had to reach an 80% coverage ratio by 2051. IPCT seems on track to reach that, even with a relatively simple strategic approach.  

Meanwhile, pensions are topical in the country. The reform of the public pension system only marginally affects second-pillar pension funds, but has sparked a debate on the role of the occupational pension fund sector. Spocci says that at the moment the real problem is the lack of suitable investment opportunities. “Any attempt to restructure the occupational pension system risks failing to address the real problem, which is the low yields and expected returns.”

“In the future, perhaps mandates of the CHF200m (€190m) to CHF300m size will be the exception, rather than the norm. Investors will have to focus on finding several smaller opportunities.” 

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