SWITZERLAND - Nearly half of all Swiss pension funds delivered performances which were below the 2.5% minimum Pension Fund Act basic rate of return in 2007, while some even booked negative returns.

These are the findings of the latest Swiss Institutional Survey conducted by Lusenti Partners, which argues the results show the basic rate was too high.

There were also "substantial differences" between the best and the worst results, with cover ratio and interest rate fluctuation reserves declining in many cases.

The study found Swiss pension funds had an average performance of 2.3% in 2007, largely because direct investments in Swiss real estate returned 5%, while alternative investments, such as commodities delivered 11%, private equity generated over 8.3% and hedge funds  contributed a return of 5.6% on the Swiss franc-valued assets.

"Some of the most representative asset classes in the portfolios, i.e. Swiss stocks and bonds denominated in Swiss francs, did not have very good performances, close to 0%," the firm said in a statement today.

However, foreign stocks and bonds denominated in foreign currencies outperformed their domestic counterparts, albeit Lucenti added indirect investments in foreign real estate declined.

The bi-annual survey, which polled 155 mostly large institutions with total assets of CHF239bn (bn), accounting for 40% of Swiss pension funds assets, found some cover ratios declined to below the level achieved by the end of 2006.

"Many institutions, especially the larger and public sector ones, use a higher technical rate - for example 3.5% or 4% - and for those [funds] in particular, underperformance resulted in a reduction of the cover ratio," said Lusenti.

The cover ratio among respondents is now 110.6% in holdings not weighted by assets and 104.3% in weighted holdings.

Private- sector pension funds still had comfortable ratios at 115.9% for non-weighted holdings and 111.0% for weighted holdings.

The fluctuation reserves - a financial buffer reserve designed to support assets when markets and interest rate fluctuate wildly - amounted to 11% at the end of 2007 in holdings not weighted by assets and 8% in weighted holdings, but this is below the levels seen at the end of 2006, and the fall of the major markets in the first few months of 2008 will further reduce those reserves.

According to the study, there was a substantial overweighting of cash among pension funds, in a cautious approach to the markets, and a significant underweighting of Swiss franc bonds, as there was reduced appeal in domestic Swiss franc bonds showing low returns.

Calculations by Credit Suisse Swiss last week found Swiss pension funds posted a negative return of -5.6% for the first quarter, while researchers have discovered structural problems with the funds. (See earlier story IPE.com: 'Swiss funds drop 5.6% amid "structural problems")