Swiss Pensionskassen have been preparing for a challenging environment of rising interest rates, high inflation and capital market volatility, while taking a hit on returns in the first months of the year as a result of the war in Ukraine.
“We have seen in the last one or two years that some Pensionskassen have started preparing for rising inflation by buying gold and precious metals, functioning as reserve currency,” Thomas Breitenmoser, head of investment consulting/controlling at Complementa, this week told a conference call on a Pensionskassen risk check-up study published by the Swiss consultancy.
Pensionskassen have been cutting fixed income allocations to reduce portfolio risk, many working on “rule-based” terms for tactical allocations with good results in the long-term, he said, adding that “timing is extremely difficult”.
For Pensionskassen betting on timing equity allocations have been tactically reduced to fend-off risks in favour of liquidity, he said.
Allocations to cash and fixed income fell to 36.6% last year, while equity allocations increased to 32.2% driven also by positive returns, while alternative investments remained stable year-on-year at 9.2%, according to the study.
Investments in real estate instead achieved a new all-time high at 22%, foreign investments increased by 1.7 percentage points to 50.7% pushed by equities and alternative investments. The expected returns with a current mixed allocation is 2.3%, the study added.
Pensionskassen have recorded negative returns of -4.7% in the first four months of this year, as a result of a negative performance from both equities and bonds. This is compared with a positive 8.3% achieved in 2021.
According to Heinz Rothacher, Complementa’s chief executive officer, the war in Ukraine has caused a “significant setback” for the performance of pension funds in the first months of the year compared with 2021. He noted his interest on “how this develops” going forward.
As a result of negative returns at the start of this year, funding ratios fell to 109.2% in April from 115.4% in 2021, however “still comfortably over 100%”, Andreas Rotacher, co-author of the study, told the conference call.
Pension funds had an average return of 5.3% per year in the period 2012-2021. It is difficult to forecast the end point for the returns this year: “We have losses on equities and bonds, part of these losses will tend to zero”, Rothacher said, but a part of the losses probably cannot be retrieved.
Last year Pensionskassen distributed 52% of returns to build up fluctuation reserves – 28% for interest rates on saved capital, 1% for administration, and 5-14% for retirement losses and adjustments to the technical parameters such as technical interest rate that fell by a further 0.05 percentage points, costing about 0.25 percentage points in terms of funding ratios.
The Umwandlungssatz, the conversion rate used to calculate pension payouts from accrued assets upon retirement, is expected to fall to 5.38% in 2022 and to 5.19% in five years, therefore the second pillar is gradually approaching the actuarially correct conversion rate of 4.79%, the study said.
If the Umwandlungssatz is fixed at retirement, and it is cut down, retirees might be compensated in cohorts, but some Pensionskassen are not in a position to enter this mechanism and others are pondering whether to bring about changes.
“We think this is important and fair”, Rothacher said.
The cohorts mechanism is relatively new, few Pensionskassen have started with the new system and others have prepared themselves to switch to the new system, but have not gone “far enough to implement it […] it’s a new trend that will consolidate,” Breitenmoser said.
BVK and the pension fund for employees of UBS bank have introduced a cohort system.
The interest rate on saved pension capital stood at 3.5% last year, according to the study at the highest point in the last 20 years, while the technical interest rate is an estimated 1.7% for 2022.
The study underlined the wide range of interest rates on saved capital, with Pensionskassen applying 1%, the minimum, but fewer applying an interest rate on saved capital of 10% or over. The average interest rate is 3.75%.
The risk check-up study conducted by Complementa has analysed 191 Pensionskassen with assets worth CHF456bn (€436bn).