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Swiss public pension funds struggle to adapt to low-yield environment

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  • Swiss public pension funds struggle to adapt to low-yield environment

SWITZERLAND - The pension fund for Bern (BPK) has hedged as much as half of its equity exposure after funding levels at the scheme continued to fall last year.

The CHF8.9bn (€7.4bn) fund for the Swiss capital returned 0.9% in 2011, above the Swiss average, but still well below its long-term anticipated return of 4.1%.

What is more, its funding level fell by 2 percentage points to 86.1%.

Drawing on analyses carried out by a number of external experts last year, the BPK decided to increase the hedging of its foreign equity exposure to 50% from April 2012.

It also decided to halve its liquidity exposure to 6%, while leaving the rest of the asset allocation virtually unaltered, according to its preliminary annual report.

Overall, the BPK's strategy aims for a 44% allocation to domestic bonds, 8% to foreign bonds, 20% to domestic equities, 18% to foreign equities and 5% to real estate.

The scheme has also decided to lower its long-term anticipated return from 4.1% to 3.1%.

The BPK also noted that several municipal authorities were thinking to leave the scheme to avoid the cost of recovery measures should funding levels fail to improve.

A number of Swiss public pension funds have come under the microscope in recent years - particularly since 2010, when the government ruled that such schemes must be at least 80% funded and achieve full funding within 40 years.

According to calculations by local asset manager Swisscanto, the average funding level of public pension funds was 88.1% at the end of 2011, yet approximately one-third of the funds were below the 80% threshold.

The CHF5.5bn pension fund for the Swiss canton of Basel-Landschaft (BLPK) will be aiming for a 100% funding level by 2014, it said.

However, last year, it saw its funding level deteriorate from 77.2% to 76.8% as the return of 0.2% was well below its long-term anticipated return of 6%.

Already at the beginning of 2011, the BLPK had increased its currency hedging from 50% of total foreign exchange exposure to hedging 80% of its foreign bonds and 100% of the currency exposure in alternative assets and real estate, while leaving the equity portfolio completely unhedged.

Meanwhile, the CHF5bn pension fund for the canton of Luzern (LUPK) managed to turn a third-quarter negative result of -1.4% into an overall positive result for 2011 of 0.9%.

Nevertheless, the funding level fell slightly year-on-year from 97.4% to 96.1%.

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