Swiss pension funds should expect to encounter phases of high volatility in equity markets, Manfred Hüsler, the director of the federal pensions regulator Oberaufsichtskommission (OAK BV), told IPE.
“With their long-term obligations, pension funds must be able, however, to cope with sometimes very high volatility in stock markets,” he said.
Adjusting or changing long-term investment strategies is rather unusual – for pension funds – as a consequence of a short-term event, Hüsler said, adding that long-term investment strategies usually take potential crisis scenarios into account.
OAK BV has published an update on the financial situation of Swiss pension funds for the first half of 2020 by analysing the data of 1,342 funds with total assets worth CHF762bn (€701bn).
Funding ratios for Swiss pension funds improved at the end of June to 107.9% from 105.4% in April. Strong market corrections triggered by the coronavirus crisis from mid-February had set off a slight decrease in the funding ratios.
The funding ratio of Swiss Pensionskassen bounced back to 103% in April after declining to 99.8% for a short time at the end of March, according to a Complementa report.
The positive performance, particularly of equity markets, led to an uptick, but still remains below 111.6% as recorded at the end of 2019, Hüsler said.
He added: “In the long term, the risks of persistently low interest rate remain, in the short to medium term there is a risk of increased volatility on the stock markets, and the coronavirus crisis can increasingly lead to arrears in contribution payments and also to bankruptcies of affiliated employers.”
OAK warned that pension funds are under stress caused particularly by a low interest rate environment coupled with the “unrealistically high” minimum conversion rate in the second pillar.
The share of underfunded pension funds was 10.2%, or 101 schemes at the end of June, meaning that 10.2% of these schemes’ obligations are not fully covered. This numebr was down from 25.4% in April, but higher than 1.1% at the end of 2019.
The supervisory body said that underfunding would likely rise by the end of this year as losses are expected for the main asset classes.
“The financial situation of pension funds was very good at the end of 2019, only a small number was underfunded – this value is expected to increase,” Hüsler said.
In the medium term, schemes will be able to mitigate at least the negative effects of the COVID-19 crisis due to the positive funding ratio they had before the pandemic started, OAK said.