The funding ratio of Swiss private pension funds weighed on assets rose last year to the highest level recorded so far to 124.6%, up from 116.1% in 2020, according to the Swisscanto Vorsorge’s Pensionskassen-Monitor.

The reported funding ratio is a little lower as some pension funds have cut technical interest rates or have increased the interest rate on the assets saved for retirement of their members, the study added.

Around 90% of private pension funds in Switzerland recorded a funding ratio of at least 115% in 2021, and their reserves rose by around half.

The funding ratio of fully funded public Pensionskassen improved year-on-year in 2021 to 116.7% from 109.2% in 2020. The share of public pension funds fully funded and with a funding ratio of at least 115% has almost doubled in the last quarter to 77.5%.

The funding ratio of partially funded Pensionskassen also increased last year to 94.4% from 87.7% in 2020.

The schemes examined in the study returned 9.25% in 2021, with performance driven by all asset classes except for foreign and Swiss bonds.

Swiss equities returned 23.38% last year, foreign equities 22.03%, commodities 31.4%, direct and indirect investments in Swiss real estate 6.02%, and hedge fund investments 2.52%.  Swiss bonds had a negative impact on performance with -1.82% and foreign bonds -1.77%.

In Q4 last year Swiss Pensionkassen returned an estimated 2.02%, but only Swiss equities (9.31%,), foreign equities (3.93%) and direct and indirect investments in Swiss real estate (+1.13%) contributed to the positive performance.

Small pension funds on the defensive

Annual returns for smaller pension funds are lower than those of their larger peers which pursue a more aggressive investment strategy, even though small pension funds have a higher risk tolerance than the larger ones.

Smaller Pensionskassen could therefore take higher risks when investing to potentially achieve higher gains, according to a further Swisscanto Vorsorge’s study examining the gap in terms of returns between small and large pension funds.

Instead, Pensionskassen with assets under management of less than CHF50m (€48.2m) have recoded on average net returns of 2.9% per year in the period 2008-2020, compared with 3.5% achieved by pension funds with assets of over CHF1bn.

That’s because smaller pension funds pursue a more defensive investment strategy, with a higher allocation to Swiss bonds and equities, lower exposure to foreign currency and a smaller allocation to foreign equities.

Larger pension funds have also heavily cut their exposure to Swiss bonds by 44% in the period 2008-2020 and increasingly invested in alternatives, asset classes with a higher return potential, Swisscanto’s study said.

Small pension funds, instead, increased their allocations to domestic real estate during this period and cut Swiss bonds by 27%, effectively shifting between defensive asset classes, the research revealed.

The investment strategy has a significant impact on the risk-return profile of a pension fund’s allocation. Studies show that in the long-term at least 80% of returns result from investment strategies in place, and the remaining 20% from sector/stock picking and timing.

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