Swiss pension funds under the spell of low interest rates
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Swiss pension funds under the spell of low interest rates
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Press Release
"Swiss Pension Funds 2013" survey by Swisscanto: Presentation of Results
Zurich, 15 May 2013 - As a result of strong performance, the most recent survey
of Swiss pension funds carried out by Swisscanto confirmed a marked improvement
in cover ratios compared with the previous year. Nevertheless, many pension
funds have still not reached their full risk capacity, restricting the extent to
which they can invest the pension assets. As a result of improved investment
results, the prospect of improving this situation remains challenging as the
recovery in interest rates continues to be delayed.
Good 2012 investment performance increases cover ratios
Thanks to an average yield of 7.2%, the cover ratios (that is, the relationship
between pension liabilities and the capital available for these liabilities in a
pension fund) were markedly improved across the board. At the end of 2012,
private-law pension funds increased their asset-weighted cover ratio from 103 to
109%, whilst the ratio for public-law pension funds with full capitalisation
increased from 95 to 100%. Public-law pension funds with partial capitalisation
fall far behind with just under 74%, with the improvement of 2 percentage points
identified being significantly more modest than in the other two categories.
The fact that only 8% of the private-law funds still had a coverage shortfall at
the end of 2012, compared with 26% a year ago, is particularly encouraging.
According to supervisory terminology, 52% of public-law funds with full
capitalisation were still considered to be slightly short of cover, although
most of these had more than a 90% cover ratio.
Target cover ratio not yet reached
Despite a strong performance in 2013 that has so far continued in the current
year, pension institutions continue to face significant challenges. The cover
ratios achieved continue to differ significantly from the intended target values
(100% cover ratio plus 16% value fluctuation reserve). In the case of private-
law funds, the deviation is 7 percentage points, whilst for public-law funds
with full capitalisation, the distance is even larger at 16 percentage points.
Therefore, many pension funds have still not reached their full risk capacity,
limiting the extent to which they can invest the pension assets.
Acting and reacting in the continued low-interest environment
The second issue is that of the persistent phase of low interest rates, which
only enables modest bond yields and can trigger significant price losses in the
event of a future increase in interest rates. Whilst the pension funds continue
to wait for a recovery in interest rates, they continue to strive to adapt their
strategies to the situation in the capital markets, particularly in the area of
fixed-interest investments. Last year, around 30% of the pension institutions
participating in the survey made adjustments, of which at least 50% reduced the
proportion of bonds they held. Similarly, around 50 per cent of pension
institutions in turn increased their target real estate allocation, in contrast
to securities, where increasing quotas is proving to be much more difficult.
Increased cost awareness
The survey showed that pension funds are acting in a far more cost-effective
fashion. They are being careful to keep expenses under control and to use any
opportunities to make cost savings both in general administration and capital
investments. In fact, the costs identified and their development in the last few
years are quite impressive. Since 2007, 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 1170 to 720 Swiss francs, whilst the largest funds with
over 10,000 beneficiaries have reduced their expenses per head by 20% from 430
to 345 Swiss francs, a similarly impressive amount in view of their
significantly lower cost base. These efforts deserve recognition and greater
attention when discussing the costs of the second pillar.
Significant corrections to the technical interest rate
Low interest rates on the capital markets combined with increased life
expectancies are forcing pension funds to regularly review the conversion rate
and technical interest rate and adjust this where necessary. Many pension
institutions have used their strong 2012 investment performance to improve their
technical data. In the last two years, the technical interest rates in defined
contribution plans have been reduced on average from 3.49 to 3.08% in private-
law funds and from 3.63 to 3.32% in public-law funds. These are corrections that
lead to significant increases in expenses for employers and active insured
persons in the event that the prevailing performance is maintained. It is
conceivable that this trend will continue despite the strong performance at
present. At least 51% of public-law funds are planning to reduce the technical
interest rate by 2015, with 25% of private-law funds that have already made
numerous adjustments in recent years planning the same.
At the same time, a persistent decrease in conversion rates must also be
monitored. For private-law funds, the average rate could fall below 6.4% in the
next year, thus falling below the minimum value set in the 2010 reconciliation.
The conversion rate of all-inclusive pension institutions could fall far below
the legal minimum if it can be demonstrated that they provide the minimum
services prescribed by the BVG.
Increased renouncement of securities lending
The dramatic events that took place in the capital markets in 2008 have also led
pension institutions to rethink their approach to securities lending. Many funds
were aware that the supposedly risk-free and temporary lending of securities
contained dangers hitherto barely considered, such as counterparty risks, for
which it may not be possible to compensate due to relatively low earnings.
Surveys on this issue show that smaller pension institutions have now largely
withdrawn from securities lending and that many of the larger funds with over 1
billion Swiss francs in assets have also given up a significant part of this
business.
13th Swisscanto survey with increased participation figures
The present survey of 343 participating funds (previous year: 340), representing
a total of 2.8 million beneficiaries (previous year: 2.5 million) and fund
assets of CHF 481 billion (previous year: 437 billion) allows informed and
differentiated predictions to be made concerning the current state of
occupational pensions in Switzerland, providing an insight into the structure,
organisation, investments and performance of the participating funds.
As part of its 13th edition, the Swisscanto survey provides valuable time series
of important indicators for many areas of the second pillar. Thanks to their
significance and transparent compilation, the survey results serve as a valuable
and oft-used tool, not only for those in charge of pension funds but also for
those interested in politics, social sciences and media.
Detailed evaluation
Further information and detailed results with diagrams and comments can be
accessed at www.swisscanto-pk-studie.ch.
In September, Swisscanto will once again publish a detailed study with analyses
and comments by experts.
Your contact:
Beat Amstutz, Head of Communication
Phone +41 58 344 43 21, beat.amstutz(at)swisscanto.ch
Swisscanto Holding AG, Waisenhausstrasse 2, CH 8021 Zurich
www.swisscanto.ch
Swisscanto - a leading Asset Manager
Swisscanto is a leading investment fund provider, asset manager and provider of
occupational and private pensions solutions in Switzerland. The joint venture of
the Swiss Cantonal Banks manages client assets of CHF 53.1 billion and employs
400 people in Zurich, Berne, Basel, Pully, London, Frankfurt and Luxembourg (31
March 2013).
As a proven specialist, Swisscanto develops high-quality investment and pension
solutions for private investors, companies and institutions. Swisscanto is
regularly recognised nationally and internationally as an outstanding fund
provider. Swisscanto is also renowned for its pioneering role in sustainable
investments and for the "Swiss Pension Funds" study, which it publishes
annually.
Swiss pension funds under the spell of low interest rates:
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Source: Swisscanto Holding AG via Thomson Reuters ONE
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