The Swiss social security system is facing increasing deficits. Losses doubled in 1998, to Sfr1.8bn (e1.1bn). Mainly as a result of demographic trends, the expenditure of the first pillar, AHV, rose by 3.5%, far more than the 1.3% rise in contributions.
Higher VAT contributions this year should achieve a more balanced result, director of social security systems Otto Piller told a press conference. Piller rejected persistent public criticism that in the long run the AHV will be exhausted. Though the demographics are not in its favour, economic growth and higher tax contributions should enable AHV to maintain today’s level of pensions, he says.
AHV is a pay-as-you-go system, but it also runs a fund, the Ausgleichsfonds. Theoretically, its earnings should cover annual payouts, but are traditionally far below. Coverage fell to 82% in 1998 because AHV’s deficit was financed by the Ausgleichsfonds. At the end of 1998 assets were Sfr24.2bn, from Sfr26bn in 1997.
Although this makes it one of the biggest institutional funds in the country, it started a performance-orientated investment policy only in 1997. The first year’s results, published recently, show performance of 15.8% and a direct return of 8%.
Its asset mix is still very conservative, with 89% held in loans and bonds. Equities account for only 8%. This year the Ausgleichsfonds will invest an additional Sfr2bn in shares, and push its equity holding up to 25% over the next three years.
Despite these modest reforms, the Ausgleichsfonds remains hostile to foreign investments. Another major obstacle is the high demand for liquidity: to meet cash flows short-term investments must amount to an uneconomically high 37% of assets. At present the Ausgleichsfonds suffers a low risk/return profile with a Sharpe ratio well below 1. It expects a 4% return and 6.4% volatility.
Its shares and some of its bonds are managed externally, with mandates awarded to 12 banks, selected by the fund’s investment adviser, Zurich-based Ecofin. Eric Solenthaler

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