Swiss Pensionskassen could face the risk of not finding exit routes this year for illiquid assets added to their investment portfolios during a year of low returns for both equities and bonds.

“Illiquid investments have so far hardly reacted to the current market situation. As a result, the share of these investments has increased and would have to be reduced by some [pension] funds,” Oliver Kunkel, partner at consultancy PPCmetrics, told IPE.

However, exit options are currently limited, which poses challenges to Pensionskassen, he added.

Kunkel authored a research paper on the returns generated by different investment strategies of Swiss institutional investors in 2022, noting the investment decisions that have paid off in a difficult year.

Return on investments of institutional investors were consistently negative and significantly lower last year compared with 2021, according to the study. Investors recorded better returns, although negative, with a higher share of illiquid assets.

For example, investment strategies with a 15% allocation to equities and 7.5% to real estate returned -11.7%, and -11.0% with 50% allocated to equities and 20% to real estate, according to the paper.

Investments in commodities generated the highest returns (17.88%) in 2022, while listed infrastructure investments, gold and hedge funds ended 2022 at a similar level compared to the beginning of the year.

The returns on listed real estate investments in Switzerland were negative last year, while those in private debt and insurance-linked strategies showed mixed results compared with bond investments, it added.

Investments in international listed real estate and in listed private equity investments showed negative returns of -23.2% and -30.0%, respectively, the study added.

Inflation and increasing interest rates led to large losses on bonds investments, with yen-denominated bonds, bonds with a rating of A or government bonds performing slightly better.

“The guaranteed benefits of Swiss pension funds are basically nominally fixed, meaning that they do not have to be adjusted to inflation, with the exception of IV pensions which, however, only make up a small part of the pension obligations,” Kunkel explained.

Therefore, the rise in interest rates can relieve pension funds from the pressure to hunt for higher returns, plus bond investments are more attractive, although the credit risk of borrowers must be carefully analysed, he added.

According to the research paper, equities in emerging countries posted slightly lower returns than equities in industrialised countries.

Yield on emerging-market bonds denominated in US dollars was significantly more negative than bonds from developed countries, whereas bonds from emerging countries in local currency reported slightly lower losses than those from developed countries, according to the study.

Negative returns recorded in 2022 have had a negative impact on the funding ratios of Swiss Pensionskassen.

“The ongoing global uncertainty poses a challenge for pension funds that are underfunded or have not accumulated fluctuation reserves,” Kunkel said.

However, most pension funds have done their “homework” in recent years and strengthened their fluctuation reserves, so that they can stick to tried-and-tested investment strategy despite losses in the past year, he added.

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