Swiss pension funds are having to deal with the prospect of selling undervalued Russian assets, which still represent a small part of their portfolio allocations, and are experiencing market corrections as a consequence of the war in Ukraine.

The question of selling Russian shares has not yet been posed for Compenswiss, the public institution managing Switzerland’s first pillar social security funds AHV, IV and EO with total assets of CHF40.88bn (€39.5bn), as Russia itself has decided to close its markets, the pension fund told IPE.

This type of measure must however be carefully studied, it added, as it could result in operations favouring those close to the current government – opportunities to buy back shares at prices well below their economic value – to the detriment of  social security in Switzerland.

Compenswiss has neither the technical possibility – nor the interest – nor the will to increase its investments in Russian securities, in particular with regard to sovereign debt, it said, adding that its position will be reviewed as the situation develops.

The pension fund has a direct exposure to Russian securities of 0.05% of its assets, as of 31 January of this year. The impact of the conflict in Ukraine on the portfolio is therefore mainly caused by the overall market decline following the invasion.

As a public law institution of the Swiss confederation Compenswiss will strictly apply all sanctions decided by the Federal Council, it said.

Migros Pensionskasse, the pension fund for the Swiss retailer, has only a small fraction of its investments in Russian companies and Russian government bonds, making up less than 0.1% of the total assets in portfolio, chief executive officer Christoph Ryter told IPE.

“We are not invested in Russian real estate. In the short term, no sale of securities, which have already gone through a significant correction, is planned, [and] no new investments are planned in Russia either,” he added.

The Pensionskasse of the City of Zurich (PKZH) has suffered “substantial losses” of around 60% since the beginning of the year on Russian assets, totalling CHF20m or 0.1% of its portfolio, it said. The pension fund does not invested in Russian government bonds or real estate.

PKZH is currently examining how to proceed with its Russian investments but “options are limited, as these investments are currently at least partially non-tradable,” it added.

The Pensionskasse for the Swiss canton of Zurich (BVK) is also in the midst of a process to re-examine its positions amid trading hurdles, it said. The pension fund has a 0.21% exposure to Russian equity and bonds, as of the end of February, while it does not hold direct investments for example in real estate or infrastructure in Russia or in Ukraine, it said.

Profond, the pension fund for small and medium-sized companies, started in January to curtail certain holdings in Russia and it has now 0.2% of its assets in a portfolio that cannot divest from, managing director Laurent Schaefli said in an interview with broadcaster SFR. It had assets under management of close to CHF11bn at the end of 2021, it added.

The Pensionskasse of the city of Basel PKBS has an exposure to Russia and Ukraine of only 0.3%, or CHF4.9m out its total assets of CHF15.15bn. Its Russian and Ukrainian assets include fixed income and equities, it said.

Manageable losses

“Interest rates, inflation and fear of war have led to losses for the Pensionskassen of 5% since the beginning of the year,” Oliver Kunkel, partner at consultancy PPCmetrics, told IPE. But, he added, losses could be cushioned by the sufficient financial reserves available at most pension funds.

At the beginning of the year the share of Russian investments held by Swiss pension funds rarely exceeded 0.5% of total assets. “Even a total loss of all these securities would therefore be manageable without any problems,” Kunkel said.

Pensionskassen design their long-term asset allocations based on asset and liability studies where target allocations undergo demanding stress tests.

“There will be a need for action for a very few [number] of pension funds based on the developments so far,” Kunkel said.

European emerging markets equity have however so far recorded the highest negative absolute return, according to a research authored by PPCmetric’s Kunkel and senior investment consultant Luca Tonizzo.

In the January-March period the MSCI Emerging Europe index was down 43.96%, the MSCI Europe excluding Switzerland index 8.45% and the MSCI North America 7.57%.

“Russian bonds and equities have lost massively in value since the beginning of the year and are mostly illiquid,” Kunkel said, adding that existing positions could only be “traded with difficulty or not at all”.

He said that Swiss Pensionskasse are also confronted with trading restrictions and must obey to sanctions. The Pensionskassen would benefit from checking how equities and securities are valued in portfolios in times of uncertainty.

“Without liquid trading there are no transparent prices, uncertainty with regards to valuation is very high for the securities affected [by trading hurdles], and we will only see fair prices when they are traded on the stock exchanges again,” he said.

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