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Swiss schemes cut bonds, abandon securities lending

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SWITZERLAND – Swiss pension funds are cutting back their bond exposure to shift into real assets and have broadly abandoned securities lending, according to Swisscanto.

The Swiss asset manager said approximately one-third of respondents to its 2012 survey of more than 340 pension funds said they adjusted their fixed income portfolios over the last year, with roughly half scaling back domestic bond holdings.

Roughly half of respondents also said they increased their target real estate allocation, mainly in domestic property.

Swisscanto also found that the financial crisis had forced schemes to "rethink" their approach to securities lending, with many realising that the "supposedly risk-free and temporary lending of securities" posed "hitherto unconsidered risks".

"Surveys on this issue," Swisscanto said, "show that smaller pension institutions have now largely withdrawn from securities lending and that many of the larger funds with more than CHF1bn in assets have also given up a significant part of this business."

The survey also found that pension funds were performing in a "far more cost-effective fashion" and had been "careful to keep expenses under control".

"Since 2007," it said, "the total expenses for capital investments and administration of insured persons have been reduced by the smallest funds with less than 250 beneficiaries by almost 40% per head on average, from around CHF1,170 to CHF720, whilst the largest funds with over 10,000 beneficiaries have reduced their expenses per head by 20% from CHF430 to CHF345."

However, in 2012, only one-third of respondents re-negotiated mandates, while two-thirds said they had not taken this step.

Swisscanto's survey confirmed the asset manager's previous estimates of a "significantly" improved average funding level and showed an even higher than expected average return at 7.2%.

According to the asset manager, "many pension institutions have used their strong 2012 investment performance to improve their technical data".

In effect, many have lowered the discount rate on active members' assets – the Technischer Zins – from 3.49% to 3.08% on average in private pensions schemes and from 3.63% to 3.32% on average in public pension funds.

Swisscanto said it expected this trend to continue, pointing out that more than half of all public pension funds it surveyed were planning to lower their rate by 2015, while one-quarter of private pension funds surveyed expected to follow suit.

As for the conversion rate – the rate used to calculate pensions from the accrued asset base – Swisscanto expects the average to fall below 6.4% in the next year, thereby dropping below the legal minimum in 2010, which pension funds are allowed to do if they manage assets above the mandatory contributions.

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