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Switzerland: the long view needed as returns fall

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SWITZERLAND – With new data showing that Swiss pension funds’ returns fell by more than 10% last year, the Association of Swiss Pension Funds is calling for a return to long-term investment thinking.

Data released today shows that the median performance of Swiss pension funds for 2002 was –10.3%. The figures coincide with a call from the Swiss pensions trade body for a return to investment for the long-term.

Jean-Pierre Steiner, the president of the investment committee of ASIP and the managing director of the 2.8 billion euro pension fund of food group Nestlé, said that ASIP is recommending “a return to investment behaviour oriented on a long-term basis.”

He said that after three bad years for equities many Swiss pension funds had exhausted their reserves. The funding level of most pension funds is near or below 100%. He estimates that funds need a minimum net yield between 3.25% and 5.0% to fulfil their promises.

“If one compares these net yield requirements with the current market interest rates, it becomes clear that today no investment strategy exists which guarantees Swiss a pension fund reaching their minimum net yield,” Steiner said in a statement.

A switch into bonds is not the answer. Swiss government bonds currently yield only 2.2% over 10 years, yet represent the largest asset class among Swiss pension funds.

Data out today by Watson Wyatt and ASIP show that, at the end of 2002, 33.2% of Swiss pension funds’ assets were allocated to Swiss bonds – up from 29.3% a year previously, and 31.2% at the end of the second quarter in 2002. International fixed income accounted for 14.2% of total assets.

Steiner said that pension funds must reduce unnecessary risks posed by too little diversification or too much exposure to equities. Last year Swiss pension funds were net buyers of international equities. 14.2% of assets were allocated to international equities at the end of 2002, although allocation to Swiss equities had fallen to 16.9% from 20.6%.

Investment managers should also consider “worst case” scenarios, says Steiner. The ASIP investment committee recommends a long-term, diversified investment strategy, with risk budgets established by asset liability studies. However, Steiner warned: “Conservative net yield prognoses should be used. The net yields of the ‘golden’ nineties should not serve as guideline.”

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