Too local for comfort
At the Novartis Pensionskasse, one of Switzerland’s leading pension institutions, the mood for risk is muted. Exposure to equities was reduced from 31% at the end of 2002 to 16% a year later; the target for this year is 20%. “The markets are still rather over-valued,” says Gino Pfister, pension fund manager at Novartis. “Our traditional buying signals are not there; of course it increased in 2003 but we don’t believe that it is solid.”
But Pfister concedes: “Our return of 5.3% last year was low compared with other funds because we had a low exposure to equities.”
Pfister’s view of bonds, which account for 60% of investments, also reflects Novartis’ conservative approach. “Bonds are basically government issued; we have very few corporate bonds, only double-A and triple-A,” he says.
Meanwhile, the Pensionskasse of the City of Zürich returned 11.2% last year, almost double that of Novartis, on account of a more aggressive approach.
Equities account for nearly 40% of the portfolio, but while this bore fruit last year it produced a negative return of 6.6% in 2002. Around three quarters of the equities are foreign, for a good reason: “We increased the amount in foreign equities and reduced the investment in Swiss equities because the Swiss market is too small to have such a large portion of a fund invested in it,” says Armin Braun, chief investment officer at City of Zürich PK. “This year we plan to increase the proportion of foreign equities to 32% compared with 8% invested in domestic stocks.”
Bonds account for a further 43%; 7.7% is invested in real estate. Of the remainder, 1.8% of the portfolio is in private equity, 2.4% in commodities and 4.4% in hedge funds, all of which are further indications of a more risk-friendly approach than to that of Novartis.
In terms of the split by type of plan Pfister notes that 79% of the assets are designated for those who are already drawing their pension, and all of those are on defined benefit plans; of the remaining 21%, Pfister estimates that 85-90% are defined benefit. In total defined contribution schemes represent only around 2% of assets. The defined contribution scheme was introduced in 1997.
The market has been stimulated by the appearance of an interesting new product which offers a choice of retirement options. “We think that with our mixed plan we are very well positioned,” says Pfister. “Normally when you retire you get all of a benefit and the surviving spouse receives 60%. Now when someone retires they can have 90% and whoever survives will get the 90% too. So it is an insurance for two lives. We started that innovation.”
As far as asset allocation on a national level is concerned, he observes that after the movements of 2001 and 2002 there has been little shift in 2003. Real estate seems to be the new topic of discussion. “Interest has grown and new money is being invested,” says Pfister.
The interest is very much in broadening portfolios to include more indirect holdings and more international investments.
Pfister also notes that money managers have been making an effort to promote hedge funds. “They have had some impact, but the effect has not been huge.”
So how conducive is the regulatory climate for the development of the second pillar in Switzerland?
“It is not hindering us regarding investment decisions at all,” says Gloor of the Civil Service Insurance Fund at the Canton of Zürich (AVS). There is plenty of flexibility to implement your own investment strategy.” However, he notes that “the minimum interest rate bound to a common benchmark has so far been a much more political discussion. But that’s not a professional way to set it”.
Braun at the City of Zürich believes that “in the investment area no need for regulations; we should leave out the limits”.
While regulation does not seem to be an issue where investments are concerned, there are other areas which appear to require attention. A major issue concerns the partial liquidation of a pension fund when part of a company is spun off. “That results in a part-liquidation of the pension fund,” says Pfister. “The issues are: when you split the assets how should they split, and do the reserves need to be split?”
He adds: “If the spun-off company receives all of its assets in cash, we were always of the opinion that it doesn’t need reserves because cash bears no risk. In the past when we spun off parts of the company we wouldn’t split reserves if the spun-off part only took cash.”
The law is moving towards a situation where, irrespective of whether the spun-off part takes cash or other assets, it will have the right to these reserves. “That was quite an issue,” says Pfister. “We defended our position saying that the reserves should be split according to the asset allocation rather than having to give a fixed sum.”
Moving forward, Gloor believes that “the main issue is that people do not yet realise that it will not be easy to guarantee peoples’ pensions within the next 20-25 years. Because of the fluctuations in market there will be two possibilities: pay more now or receive less later”.