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February 22, 2024
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Swiss pension funds over invested in real estate, alternatives | News


Swiss pension funds remain over invested in real estate and alternatives this year, although the number of schemes exceeding the thresholds set by law decreased.

“A slightly lower share of pension funds exceeded the limits according to [the occupational pension law] BVV 2 for real estate or alternative investments, as of the end of June,” Stephan Skaanes and Alfredo Fusetti, partners at consultancy PPCMetrics, told IPE.

On the other hand, pension funds are not exceeding regulatory limits for equities and infrastructure, they added.

At the end of last year, 13 pension funds exceeded their limits for alternative investments by 15%, and for 81 pension funds the limit for real estate was exceeded by 30%, according to PPCMetrics’ study Pensionskassen-Jahrbuch 2023.

The schemes kept investment within the limits for equities (50%) and infrastructure (10%), with a new separate category introduced in 2020, the report added. In total, 88 out of 263 pension funds (around 33.5%) exceeded at least one category limit according to BVV 2.

A tough 2022 for investments in liquid assets partly explained the higher share of investments in alternatives and real estate, the consultancy said.

Pension funds can exceed BVV2 limits, after approval by a pension fund’s board of trustees, including them in their investment strategy, and justifying the reasons for exceeding the limits in annual reports, Skaanes and Fusetti explained.

Pension funds have meanwhile recovered, recording average returns of 4% since the beginning of the year, as of 14 September, from -9.97% on average recorded last year, according to the PPCMetrics Pension Ticker.

The average technical funding ratio of Swiss pension funds (PPCmetrics Peer Group) has increased by 2.4 percentage points to around 108.6%. Also, the economy funding ratio has improved since the beginning of 2023 by 0.1 percentage points, estimated at 10.1% on average.

PPCMetrics observed the most notable change in the asset allocation of pension schemes with bonds denominated in foreign currency (0.9 percentage points) and Swiss bonds (-1.2 percentage points), according to the report.

“Over the last 10 years, Swiss pension funds have reduced the strategic share of nominal values [of portfolio investments] by around 10 percentage points. This primarily benefits real estate, equities and illiquid investments. However, this trend was slowed by the increase in interest rates last year,” Skaanes and Fusetti said.

Last year pension funds invested on average 24.3% of their assets in Swiss bonds, 13.4% in foreign currency bonds, 10.2% in Swiss equities, 20.5% in foreign equities, 4.1% in alternatives, 1.4% in infrastructure, 24.1% in real estate and 1.9% in cash, according to PPCMetrics.

The report analysed 299 pension funds with assets under management of approximately CHF727bn and around 3.7 million members.

PPCmetrics has recorded for the first time since it started collecting data in 2008 an increase in the average technical interest rate to discount future benefits by 0.15 percentage points to 1.62% in 2022.

The average technical interest rate fell over the last 14 years from around 3.71% in 2008 to around 1.47% in 2021.

The conversion rate used to calculate pension pay-outs (Umwandlugssatz) continued to fall last year by around -0.19 percentage points to 5.33%, according to the study.

Asset management costs increased from 0.42% (2021) to 0.49% (2022), with higher performance fees for private equity and infrastructure, it said.

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