Administrative costs of pension schemes

Comment on the report of the Swiss Federal Audit Office of 25 January and the media coverage:

Costs are an important aspect for all pension funds nowadays, both in administration and in investment. The supreme body of pension funds must pay attention to this. This is also stipulated by the fiduciary duty. When comparing occupational pension schemes (pension funds, 2nd pillar) and the state pension scheme (AHV, 1st pillar), it must be taken into account that the AHV operates on a pay-as-you-go basis on the one hand and does not implement the same investment strategy as most pension funds (compenswiss, AHV/IV/EO compensation fund) on the other.

Since the introduction of the directive on the disclosure of asset management costs by the Occupational Pension Supervisory Commission in 2013, costs are measured and reported systematically. As a result, transparency of costs has improved significantly in pension schemes. Be careful, however: When interpreting the cost level of a pension fund, both the asset allocation and the investment style must be taken into account. For example, passive investments in shares and bonds are comparatively inexpensive, in contrast to real estate or alternative investments, where the costs are significantly higher. Hence, a mere comparison of the absolute expense ratios is not sufficiently conclusive. Nonetheless, savings potential may still remain unexploited. A periodic review is therefore advisable.

When selecting new investments, the cost aspect must be given sufficient consideration since otherwise investors will not attain the potential performance. Pension funds invest large volumes. Due to their size, pension funds have an advantage over private investors and can get better prices. However, the managers of the pension funds must find an appropriate balance between cost awareness and exaggerated savings measures. Pension funds ought to be analysed holistically, as costs, returns and also risks complexly interact with each other. An isolated consideration of the cost ratio should be viewed with caution, not only from a technical but also from an economic perspective. Our observations of recent years show mixed results in terms of investment performance and asset management costs. It cannot be clearly determined whether pension funds with low asset management costs also achieve higher net returns. The asset allocation has the greatest influence on the investment result. It is up to the pension fund managers to determine the asset allocation and it should be reviewed periodically within the framework of ALM studies.

Returns achieved by level of asset management costs (own data)

We recommend pension funds to use low-cost investment solutions such as passive investments. Like any conscious consumer, they must get informed and weigh up the offers. Price plays a major role, but in the end the net return is decisive. Investments in real estate or alternative investments with higher asset management costs are an integral part of the asset allocation of pension funds and are beneficial in terms of diversification. Cutting back on such investments due to the cost level could also have a negative effect.

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