Â鶹´«Ã½ÔÚÏß

In this study commissioned by the Â鶹´«Ã½ÔÚÏß (AMAS), the consulting firm WTW has analysed and quantified the risk capacity and return potential of pension funds with regard to the investment risks taken.

These are the results of the study at a glance:

• The proprietary model of the WTW makes it possible for the first time to create mathematically robust quantitative evaluations of individual risk capacity. Most pension funds have their investment risks under control. Nevertheless, more than three quarters of pension funds can increase their investment risks without running the risk of falling into an unsustainable underfunding.
• Most pension funds can increase the expected return by optimizing the investment strategy without accepting higher risks. The study identified three main reasons for this.
• It is not only the task of the board of trustees to limit investment risks as adequately as possible, but also to generate returns that are appropriate to the risk. Not only a lack of security, but also overly passive or conservative behaviour can justify a lack of care and endanger the goals of occupational pension provision.

Additional return potential available

The analyses lead to the conclusion that pension funds in Switzerland often have considerable potential for additional returns with the same investment risk - or even additional potential if the existing risk budget is utilised. This is because they are currently pursuing investment strategies with a return potential that is between 0.3% and 0.5% below the efficiency frontier. At the same time, the full risk capacity is often not utilised.

More efficient investment strategies

Company pension funds in particular offer the greatest scope for action in this respect, although there is a wide range of options. Collective and joint institutions (SGE) and public pension funds are on average much closer to the efficiency limit. This may be due to the generally larger investment volume, which in many cases requires more professionalised investment management. The 25% of pension funds with the greatest scope for efficiency could increase their expected return by an average of 0.84% per year simply by utilising the higher return potential while maintaining the same level of risk. Over a time horizon of ten years, such an optimisation would increase the insured benefits of these pension funds by around 11.7% per insured person.

The analysis also showed that the pension funds with the highest proportion of bonds and the lowest proportion of alternative investments pursue the most optimisable investment strategies. The home bias also often leads to inefficient strategies, i.e. the tendency to favour investments from the Swiss home market.

It can be concluded from the analysis that the following measures can boost the investment strategies of these pension funds:

• Reduction of bonds
• Reduction of the home bias (home market inclination)
• Development of alternative investments such as hedge funds, infrastructure and private equity.

Better utilisation of risk capacity

Unutilised risk capacity also creates further potential for returns. The 25% of pension funds with the lowest utilisation of the ‘simple’ risk budget up to the ‘low underfunding’ volatility threshold (risk budget 1) could increase their expected return by an average of 0.95% per year. With a time horizon of ten years, such an optimisation would increase the insured benefits by approx. 13.6% per insured person.

The investment risks taken are largely acceptable

The evaluation of the utilisation of risk capacity shows that all pension funds take on more or less underfunding risks. However, both company-owned and public-law pension funds and SBUs almost only take on risks that can be borne with the restructuring budget. The investment risk of their portfolios remains on average below their respective volatility limits.

Responsibility of the Board of Trustees

The highest governing body, usually the Board of Trustees, must deal specifically with the investment risks taken in connection with the risk capacity of the pension fund and periodically review and document the development accordingly.

Both the law and the Federal Supreme Court recognise that the return on assets of pension funds as the third contributor makes a significant contribution to achieving the constitutional objective of occupational pension provision. Accordingly, the legal mandate is to generate returns with an investment strategy appropriate to the risk and with due diligence. It is therefore not only the task of the Board of Trustees to limit investment risks as adequately as possible, but also to generate risk-appropriate returns.