Return gap with smaller pension funds

Key performance factors

Do economies of scale lead to better performance? This question arises in light of the fact that large funds with assets of more than CHF 1 billion generated more than half a percent higher returns for their insured members than small pension funds with less than CHF 50 million in assets. While the net return of the small funds is 2.9 percent per year on average, large funds achieved an average of 3.5 percent per year.

In our study, we examined the following key performance factors to explain these differences: 

The investment strategy determines the return

Various studies show that in the long term, at least 80 percent of the return on portfolios is determined by the investment strategy. The remaining 20 percent results from sector or securities selection and timing. The investment strategy of a fund, including the decision on how high the anticipated risk may be, is the responsibility of the board of trustees. In consideration of the obligations, the risk capacity of each pension fund forms the basis for determining the investment strategy. This is precisely where the smaller pension funds act differently, as our focus article shows.

Small funds do not exhaust their risk capacity

Overall, small funds invest fairly defensively, although their risk capacity would permit a more aggressive investment strategy. As a result, they do not exhaust their risk capacity and adapt less to new market conditions. They also comply more closely with OPO 2 requirements. The strategic requirements are the responsibility of the board of trustees. Further professionalisation of risk management could prove to be the key for the Swiss pension landscape.