Swiss Pension Fund Study 2022: Higher pensions are on the horizon – the only obstacle is the current market situation

2021 was a successful year for Swiss pension funds, according to the 22nd edition of the Swisscanto Pension Fund Study. They achieved an average net return of 8.4% – the second highest in the last decade and significantly above the ten-year average of 5.4%. The pension funds have made targeted use of the high returns generated in recent years in order to increase their financial strength and they are now in a comfortable position. As a result, they have greater room for manoeuvre – especially regarding the interest paid on retirement assets. Active insured members are benefiting from higher interest rates; viewed across all pension funds, the average interest rate was 4.25% in 2021 –  the highest level since 2001. 

Redistribution from active insured members to pensioners has stopped

Pension funds have used the years in which they generated strong returns to take steps to prepare for the future as well as possible: They adjusted the technical interest rate, built up fluctuation reserves, switched to the use of generational tables, reduced the conversion rate and increased the retirement age. As a result of all these measures, redistribution from active insured members to pensioners – which runs contrary to the spirit of the system – has stopped.

However, a two-tier system of pension funds has now emerged: Pension funds that have already increased their fluctuation reserves to over 75% have been able to pay twice as much interest on the retirement assets of insured members as funds with lower reserves. The exemplary pension funds are now free to change direction by paying higher interest on the retirement assets of actively insured members in the future. In the case of pension funds that still need to catch up, their insured members stand to lose out: If sufficient reserves have not been accumulated, the interest paid on their retirement assets will be below average. The decisive factor for insured members is which pension fund they are insured with through their employer.

Top pension funds generate ten times the return of other funds

A sustained high return on investment will remain essential in the future to ensure a good interest rate on retirement assets. In terms of performance, there is a significant variation between the lowest and the highest returns – a trend that has been visible in the study for years. In 2021, the lowest return was 1.34%, while the return generated by the top-performing fund was more than ten times higher at 15.97%. This is also the case in the medium term: Over a period of five years, the one-tenth of pension funds that delivered the weakest performance generated an annual return of 3.88%; the most successful one-tenth of funds achieved an annual return of 7.21%. There are structural reasons for these differences, such as the size of the pension fund, the specific characteristics of each industry and asset allocation. 

Bonds do not offer security in the current market turmoil

In terms of the investment mix, pension funds relied on a record-high equity ratio in 2021 that averaged 33.7%. Asset allocation is a decisive factor and its importance has increased even further since the start of 2022 due to the war in Ukraine, global supply chain issues and rising interest rates: Bonds are considered to be a secure form of investment but they were unable to make the most of their defensive qualities at the start of the year. This led to losses for all Swiss pension funds (average –7.9% for bonds in CHF and 

–7.2% for bonds in foreign currencies). As a result, defensively positioned pension funds with a large proportion of bonds experienced almost the same level of losses from January to April as pension funds with a large equity weighting: The one-tenth of pension funds that generated the weakest performance over the last five years experienced losses of 5.2%, while the top performing one-tenth of funds recorded approximately the same level of losses at 5.1%. There is no option other than to include equities in the investment mix. 

“Last year clearly showed how much insured members benefit when their pension fund takes the right steps and achieves the right investment performance. Funds with good reserves should now transfer this excess funding to insured members,” stated Iwan Deplazes, Head Asset Management at Zürcher Kantonalbank. “Investing remains the elixir of life for pension funds. Given current market conditions, the right investment strategy is now more important than ever.”

Pension funds deliver on their performance promises

At the end of 2021, coverage ratios reached an all-time high: Private-sector pension funds reported an average coverage ratio of 122.1% − an increase of 6 percentage points compared to the prior year. Positive equity market developments were the main driver of this increase. Although coverage ratios hovered at around 110% for a long time, the curve has increased sharply since 2018, rising by more than 13 percentage points. At 122.1% at the end of 2021, pension funds exceeded their own 18.5% target for fluctuation reserves for the first time. They achieved this despite boards of trustees having increased the average target for private-sector pension funds from 15.9% in 2012 to 18.5%. The pension funds therefore have free funds to use for benefit improvements. As a result of current market conditions, however, coverage ratios declined again slightly to 117.3% at the end of March 2022 and were thus just below the target coverage ratio.

Turnaround in interest rates halts decline in technical interest rate

Solid reserves have allowed for a reversal of the trend in the technical interest rate. It is based on the maximum technical interest rate recommended by the Swiss Chamber of Pension Fund Experts and shows the long-term financial obligations used by the pension funds in their calculations. On the basis of their calculations, the experts recommended in 2021 that the technical interest rate should be increased in view of rising interest rates; a similar recommendation could follow in 2022. The current average technical interest rates are now below the recommended maximum level, meaning that the pension funds consider their pension promises to be realistic. In contrast, the conversion rate will continue to decrease according to the figures in the Pension Fund Study: For men with a retirement age of 65, the conversion rate will fall from 5.43% in 2022 to 5.25% in 2026. 

“Pension funds are in good shape and can deliver on their pension promises. We are witnessing a trend reversal: It has finally been possible to end redistribution from active insured members to pensioners. Higher pensions are now on the horizon,” stated Heini Dändliker, Head Key Account Management Corporate Clients Switzerland at Zürcher Kantonalbank.

Many funds expect BVG reform

In their proposals for the planned reform that is currently under discussion, the National Council and the Council of States Commission want to lower the entry threshold for compulsory insurance. However, the Federal Council has not addressed this topic in the BVG reform. At present, part-time workers and people working for multiple employers are at a disadvantage if they earn less than CHF 21,510 per annum. One-quarter of the pension funds surveyed have already lowered this threshold or made it variable. There are also discussions about lowering the coordination deduction, which places part-time workers in particular at a disadvantage. However, 86% of the pension funds already offer flexile coordination deduction models. The deduction depends either on the degree of employment or the insured salary. Some pension funds do not calculate any coordination deduction. Only a minority (14% of pension funds) still uses fixed coordination deduction models that are not weighted according to the degree of employment. This shows that some of the pension funds are already one step ahead of politics in this area.

Little progress with CO₂ measures

A different picture emerges in the case of another relevant topic: The integration of sustainability criteria. In 2021, 33% of pension funds had already integrated environmental, social and governance (ESG) criteria into their investment regulations, compared to 25% in 2020. However, they are primarily the major pension funds that assign the necessary relevance to this topic. Smaller funds are lagging behind by around six years. There has been little progress when it comes to measuring the CO₂ intensity of portfolios or determining actual reduction targets: Only 6% have a concrete reduction target, although 10% are starting to think about defining targets. 

Women are significantly underrepresented on boards of trustees

For the first time, pension funds were asked about the composition and work of their boards of trustees in the context of the study. On average, a board of trustees has eight members, who are usually part of the company. When reaching investment decisions, around 80% of all pension funds rely on an investment committee; this is almost always the case among larger funds. Although 43% of insured members are women, female representation in the pension funds’ senior governing body stands at only 22%.

About the study

The 22nd edition of the Swisscanto Pension Fund Study surveyed 475 pension funds whose members have assets totalling CHF 806 billion. Overall, almost 3.8 million insured members are represented in the study. The participating pension funds manage around 76% of the pension assets recorded in Switzerland according to data for 2020 from the Federal Statistical Office. 

Further information is available at: pensionstudy.swisscanto.com