SWITZERLAND - Swiss pension funds that are currently underfunded should adopt a more "risk-averse" strategy by investing heavily in bonds, eschewingequities, according to a leading Swiss investment consultant.
Martin Janssen, managing director of Swiss-based consultant Ecofin, noted that more than 50% of pension funds would fall into the underfunded category if liabilities were calculated using a lower discount rate of 2 or 2.5%.
He said: If you discount by 5%, most pension funds would have enoughassets to cover their liabilities. But if you use 2%, then more than 50% of pension funds will not be able to cover their liabilities. Currently, most pension funds use an actuarial discount rate of 4%, but that is too high. Ideally, this rate should be around 2.5%.
He added: A pension fund that does not have enough assets to cover itsliabilities needs someone to bear its risk. In Switzerland, this is typically the employer and the employee and not the pensioner. Of course, the investment strategy has to keep this in mind.
However, Jürg Walter, president of the Swiss Chamber of Actuaries, pointed out that investing only in bonds is not a risk-free strategy: “This is particularly the case when the risk of a depreciation with increasing interest rates is sensed as rather high under the given economic situation.
“Furthermore, if the fluctuation reserves are very low, it may be that no asset strategy is consistent with both the needed performance and the level of fluctuation reserves. The kind and the structure of the liabilities have an influence on the asset strategy too.”
The declining markets over the period of three years in 2001-2003 opened up huge holes in funding levels, resulting in a hefty cutback in equities.
Currently, Swiss pension funds only have around 25% in equities, while figures at the end of 2004 showed that 10% of pension schemes were underfunded as compared to 20% in 2002.
The Pension Protection Fund (PPF) is consulting on changes to the actuarial assumptions it uses in valuations in a bid to better reflect the bulk annuity market, with schemes set to move into surplus on aggregate.
Private sector defined benefit (DB) schemes were 96.3% funded on a Pension Protection Fund (PPF) compensation basis at the end of July, according to the lifeboat fund's monthly index.
The Pensions Regulator (TPR) and Financial Conduct Authority (FCA) have launched a refreshed ScamSmart campaign to warn savers about unsolicited pension communications.
Ann Harris OBE and Mike Dailly have been appointed non-executive directors at the upcoming single financial guidance body (SFGB).