A study by the Asset Management Association Switzerland / WTW
Investment returns are the key factors of Swiss pension systems. Since 2004, the second pillar has generated over CHF 500 billion in net returns for beneficiaries, which is more than the contributions from employees or employers. This translates to around CHF 100,000 per insured person. Following two years of investments with above-average returns, the Swiss pension fund sector is in a very stable financial position. In 2024, the pension funds achieved an average performance of around 8%. The average capital-weighted funding ratio was 118.5% at the end of the 2024 third quarter.
Given this situation, it is surprising that public discussion focuses almost exclusively on costs and conversion rates. Furthermore, the vote on the BVG reform also means that longer life expectancy cannot be offset by lower conversion rates. Therefore, the overall performance of the pension system must continue to increase. The most important factor for retirement benefits is the investment return of the pension fund. Various studies show that the investment returns of pension funds vary widely. In 2023, the average return was 5.1%, while almost 10% of the pension funds achieved an investment return above 7%.
Investment returns are determined by two main factors: the nature of the risk and the asset allocation. Both factors are highly interdependent. However, pension funds have different risk capacities depending on their membership risk profile, financing structure and benefits insured under the pension plan. Taking all this into consideration, the board of trustees defines the optimal investment strategy.
Determining the risk capacity of a pension fund is not an easy task. So far, there exists no standardized approach. In this study, WTW has applied their in-house model to a large dataset for the first time. The risk capacity was then compared to the actual investment risks. The results are insightful and confirm the effective risk management of most pension funds.
However, when choosing the asset allocation, certain systematic inefficiencies become apparent. Based on risk capacity, an appropriate investment risk is taken, but an efficient portfolio with the same risk often provides better returns, which could be further enhanced by fully utilizing the risk capacity. The study highlights a selection of typical investment biases.
The recent decisions by the Federal Court regarding the liability of pension fund board members for investment losses have caused a lot of concern. The highest governing body carries significant responsibility and is often composed of a lay committee that works with great dedication for the well-being of the insured. Understandably, trustees wish to avoid personal liability due to high investment risks in the pension fund given the substantial amounts involved in the second pillar. This study provides a detailed legal assessment outlining the limits of liability, enabling trustees to confidently utilise their fund's risk capacity to generate optimal investment returns. The assessment also clarifies that taking on too little investment risk can lead to liability issues, as it fails to fulfil the legal mandate.
The Asset Management Association advocates for the optimal conditions for pension funds in Switzerland. The three-pillars system is among the best pension systems in the world, and pension funds play a key role in providing well-funded and affordable pension benefits. The key to this is investment returns. Proper implementation of risk capacity and optimal investment strategies are core competencies of asset managers. Harnessing the industry’s expertise is crucial to maximize the pensions of tomorrow.
The joint study between the Asset Management Association Switzerland and WTW aims to provide board members, investment committee members, and other interested parties with a tool to enhance their decision-making and, in turn, optimize investment returns.
| Title | File Type | File Size |
|---|---|---|
| Risikofähigkeit und Anlagerisiken von Schweizer Pensionskassen | 3.4 MB |
