SWITZERLAND - Swiss pension funds' fixed income portfolios will see more foreign currency hedging and a larger share of corporate bonds, according to Swisscanto.
In its latest study on Swiss Pensionskassen, the asset management company calculated an average funding level of 95% for all pension funds to the end of August, with private ones being fully funded at 100% on average and public ones underfunded at 88.9% on average.
But Swisscanto pointed out that, without foreign currency hedge, the average overall funding level would have been 92.9%, according to the simulation done in cooperation with consultancy Complementa.
Peter Bänziger, chief investment officer at Swisscanto, told IPE: "Around 57% of the FX exposure in pension fund portfolios is hedged against Swiss francs."
He predicted this share would increase because currency hedging will be used "systematically" now that the euro is moving away from the €1.20 conversion rate set by the Swiss National Bank (SNB).
Swisscanto said it saw a definite increase in foreign currency bonds in portfolios in recent years, with many Pensionskassen still using government bond benchmarks.
"Given the high debt levels, these no longer serve the purpose intended for when they were first applied, so pension funds will need to change those benchmarks," Bänziger said.
He sees a shift to corporate bonds, while there is still a "psychological barrier" regarding emerging market debt.
However, Bänziger confirmed a major increase in inflows to emerging market bond funds and also sees opportunities for currency bets with emerging market bonds in local currency.
As a further diversification, Swisscanto recommends that Pensionskassen look at high-yield bonds, convertibles and inflation-linkers.
"At the moment," Bänziger said, "inflation-linked bonds are unattractive, but, in the case of a sudden hike in inflation, they will protect the portfolio."
Such a hike is feared in Switzerland if only because the SNB's pegging of the Swiss franc to the German mark in 1978 led to inflation spiking at 7% in 1981.
But Bänziger stressed that portfolio restructuring measures alone would not help Pensionskassen achieve minimum rates currently set by politicians.
Meanwhile, Swisscanto has agreed with the Swiss pension fund association ASIP that both the so-called technischer Zins (the interest granted on pension money) and the conversion rate used to calculate a pension from accrued capital are too high.
"It cannot be that, over a longer period of time, the politically set targets are out of line with the economic reality," Bänziger said.
"If this continues, the second pillar will either run into structural difficulties or Pensionskassen will have to take much more risk.
"But they cannot do this at the moment with the funding level being at just 100% for private pension funds."