Rachel Fixsen finds the old conservatism is waning

Making as much money as possible for beneficiaries is a key goal for any pension fund, and Swiss fund managers are increasingly aware of this. Legal changes in Switzerland last year focused on the need for pension funds to maximise their returns. And the result has, not surprisingly, been increasing diversification towards stocks and overseas investments.

In the past, Swiss pension funds have suffered from comparatively poor returns. According to a study by PDFM, the 11-year average return to 1993 was 4.1% on a real basis. This ranked Switzerland 17th out of 18 countries reviewed. A lot of this is down to the conservatism of many funds, which manifests itself in overwhelming domestic bond weightings, exacerbated by the lacklustre performance of Swiss bonds.

The Swiss private pensions market is the third largest in continental Europe after the Netherlands and Germany. The landlocked country has around Sfr400bn ($277bn) in pensions assets. Since legislation was introduced in 1985, all employers have been required to provide a second tier of pension benefits to supplement the state provision.

Among pension funds in Switzerland, a few years ago there were found to be some significant shortfalls between assets and liabilities as a result of the use of financial instruments. This prompted a review of one of the laws governing pension plans - the ordinance on pension plans (OPP2) - and subsequently three amendments to this law came into effect last April.

One of the amendments requires foundation boards of pension funds to establish objectives and principles for investing the assets, including expected investment return and liquidity profile. The foundation board is the body which administers a pension plan, and is made up equally of employer and employee representatives.

Cameron Hannah, senior consultant at William Mercer in Geneva, reports a very significant investment shift towards equities among Swiss pension funds. Average assets are moving in that direction at a rate of 15-20% a year, he says. Investment in Swiss bonds is probably holding its own at about Sfr100bn, but the excess growth goes into equities," he says.

Latest figures for 1994 from 'La Prévoyance Professionelle et Suisse', published by the Federal Statistics office in Berne show this (see graph) while Swiss equity holdings rose by 40% since 1992, overseas equities rose 139%.

This change of tide, and more interest in overseas investments, is due to a raising of awareness in Switzerland of the role of assets in producing returns, Hannah says. "The 1995 change in the law highlighted the onus on foundation boards to control the investment process, and the need to have clear objectives and strategy."

At the end of 1995, only 14.2% of average Swiss pension fund assets were invested in shares, with domestic shares taking up 10% and foreign shares 4.2%, according to data from InterSec pensions consultants. The fattest asset class was domestic bonds at 29.7%, followed by loans and mortgages with a 19% weighting.

Regulations restrict asset allocation in Switzerland, although these rules are not cast in stone. If a fund exceeds any of the limits, it simply submits a professional justification to the local pension fund supervisory office, which exists in each canton, which is either accepted or rejected.

John Anthony, head of Watson Wyatt in Switzerland, says he is aware of funds which have been granted leave to exceed limits. "It's not something that's a theoretical possibility that never works... to gain acceptance the arguments should be based on analysis and not vague assumptions."

The limits are as follows. Cash and Swiss franc bonds issued by domestic borrowers are unlimited. Foreign currency bonds are limited to 20% of a portfolio and Swiss franc bonds issued by foreign borrowers are allowed up to 30%. But the total of the latter two asset classes cannot exceed 30%.

Up to 30 % of assets can be held in domestic equities, and 25% in foreign equities, though total equities exposure cannot be more than 30%. Swiss property can account for 50% of assets and foreign property for 5%.

Total exposure to foreign currency investments must not be more than 30% of assets, and domestic equities and domestic property must not add up to more than 70%. On top of this, domestic equities, domestic real estate and foreign currency in total are subject to a cap of 70%.

Most Swiss pension funds are invested very conservatively, and Hannah says they have a long way to go before, on average, they come up against the restrictions. But there are some funds which are already at the limits - often the pension funds of international companies with more active foundation boards, he says.

Mike McShee of Buck Consultants in Geneva says there is a lot of change happening at the moment in Swiss pension fund asset allocation.

"It's hard to say anything's average... ," he says. "One used to be able to says that public pension funds were very conservative, but that's not generally a true statement now because plenty of public pension funds are progressing now. Actually the big and old Swiss companies are at the vanguard of change."

Funds are moving to greater equity content, and this is set to continue. "There's still room for more, but the shift will be steady and unspectacular," says Anthony. He says the fact that equity levels at Swiss pension funds are low is due to their innate conservatism, rather than any belief that the liability profiles warrant this. "Asset-liability modelling has gained some ground and the larger funds are doing something about it," he says. "But making the link between liability profile and investment structure... is a process which takes time."

Consultants say asset-liability modelling exercises have been taking various benchmark portfolios as their guide, rather than the preferable route of comparing performance with a universe - mass information gathered from real funds. "Performance universes are in their infancy" says Hannah. Rachel Fixsen is a freelance journalist"