2023 was a volatile investment year for pension funds, characterized by geopolitical tensions and international central banks’ continuing tight monetary policy. Pension funds were able to achieve an average return of 5.2% last year. 2024 has also been going well up to now. Equities in particular have been able to seamlessly build on last year’s end-of-year rally. Pension funds’ capital investments posted a return of 6.1% in the first eight months. As a result, the average funded ratio rose from 107.6% at the end of 2023 to 112.6% at the end of August 2024. Interest of 2.3% was paid on employees’ actuarial capital in 2023.
Download: Read the press release in pdf format as of 4 September 2024.
Positive returns in 2023
Swiss pension funds continued to face major challenges in 2023. Thanks to a year’s-end spurt, which was partly driven by the expectation of falling key interest rates, Swiss pension funds reported an average return of 5.2% in 2023. The positive result for the year is also noticeable in the fluctuation reserve. The capital-weighted funded ratio rose from 104.0% at the end of 2022 to 107.6% at the end of 2023. Consequently, the picture has also changed for underfunded pension funds: the number of underfunded funds has decreased from 8.8% to 5.1% in the space of a year. In terms of actuarial reserves, these funds account for a good 16% of pension capital.
Beneficiaries also benefit from the good returns: for 2023, pension funds paid an average interest rate of 2.3% on the actuarial capital of employees in defined-contribution plans. About 84% of pension funds award additional interest (interest above the BVG/LPP minimum of 1.0%).
Substitution of fixed-interest investments is easing off
Some pension funds are taking advantage of the current interest-rate environment to review their strategic asset allocation. For example, this year about 15% of pension funds state that they intend to increase their bond holdings (investment grade). They have a slight preference for Swiss-franc bonds compared to bonds in foreign currencies. These planned changes are already partially reflected in the figures as at the end of 2023.
But fixed-interest investments reached a new low in 2023 since data collection began, with a share of 31.6%. However, the decline seen in the past year is lower than in previous years and concerns mainly foreign-currency bonds. In contrast, the proportion of Swiss-franc bonds rose slightly last year.
Good performance on the equity markets is pushing down the real-estate share
Thanks to good returns on the markets, the proportion of equities has risen again significantly. It is clear that pension funds even made some minor sales in order to curb the increase.
In addition, pension funds continue to invest a large proportion of their assets in real estate. The current share is 22.9% (previous year: 24.0%). The decline is attributable not to sales, but primarily to the performance effects of the remaining assets.
About 80% of pension funds invest in alternative investments. Alternative investments (including infrastructure) accounted for 9.7% of total assets at the end of 2023. Infrastructure investments are also very popular, in addition to those in private equity. Recent years have seen significant growth in this sub-category. Apart from increases, this is also attributable to new investments. Thus about 50% of pension funds currently allocate part of their assets to infrastructure investments.
Almost half of pension fund assets are invested abroad. On average, pension fund institutions hedge approximately two thirds of their currency risks. The proportion of foreign currency (after hedging) is 17.6%.
Low costs are not a guarantee of higher returns – nor are high costs
At 0.42%, asset management costs in 2023 were lower than in the previous year, while the cost transparency ratio remains constant at 99.7%. The level of costs depends to a large extent on the asset allocation. For example, liquid investments (e.g. equities) are less costly to realize than illiquid investments (e.g. directly-owned real estate). As a result, there are differences within the group of participants. The cost ratios range between 0.2% and 0.9% (5% and 95% quantile). If one takes a short-term view, like for example 2022, non-liquid products can help to reduce price losses. Over a longer-term observation period (since 2013), both pension funds with a high cost ratio (>0.75%) and those with a low cost ratio (<0.25%) show the same average annual return of 3.7%.
Focus on investment strategy
Careful drafting of the investment strategy as part of an asset liability management study (ALM study) results not only from the Board of Trustees’ list of tasks, but also from the great influence that the selected investment strategy has on the risk and return characteristics of the portfolios implemented. Pension funds generally conduct an ALM study or an asset-only study every three to five years.
The survey shows that the assessment of current positioning and the internal requirement to conduct an ALM study periodically are regarded as the most important motivations. Furthermore, significant changes on the liabilities side (e.g. technical parameters or the number of insured persons) and changes on the assets side (e.g. interest-rate environment, risk premiums) are also highlighted as important motivations for the ALM cycle.
Technical interest rates rise again
The technical interest rate was also increased in 2023, as it was the previous year. While it was still 1.61% at the end of 2021, it is currently 1.76%. Retirees’ actuarial capital and the actuarial provisions that are dependent on the technical interest rate will decrease accordingly, and thereby have a positive impact on the funded ratio. The conversion rate, on the other hand, continues to decrease. In 2024, savings deposits will be converted into a pension at an average rate of 5.23% at the age of 65. Due to the imputation principle, pension funds are moving further away from the BVG/LPP minimum conversion rate of 6.8%, which does not take sufficient account either of increased life expectancy or of the current interest rate level. A conversion rate that is set too high leads to pension losses upon retirement. Pension funds have already decided to make further reductions for the next five years to counteract this redistribution. As a result, the average conversion rate is likely to decrease to 5.10% by 2029.
Charts
Motivation for conducting an ALM study
About the study
The “Risk Check-up” pension fund study is celebrating its 30th edition in 2024. The largest independent pension fund study in Switzerland gives a representative picture of the 2nd pillar and provides pension institutions and their stakeholders with valuable insights, trends and long-term comparisons. The study management provides information on key findings in May of each year and the overall assessment and on a special topic in September.
The 2024 study is based on a corpus of data from 445 pension funds with assets totalling CHF 810 billion. The assessments of 189 pension fund managers were also obtained for the special topic.
You may download the latest Risk Check-up study here. For more information about the project, please proceed here.
Contact
If you have any questions, you may contact the study team as follows:
Contact: riskcheckup@complementa.ch