Occupational pension schemes in Switzerland hold substantial wealth, totaling 1,200 billion francs, with returns exceeding 600 billion francs since 2004. Amas suggests that by refining investment strategies and increasing risk budgets, funds could enhance returns by 0.3 to 0.5 percent annually. Additionally, reducing bond allocations and addressing home bias could further improve performance, as funds heavily invested in domestic markets have underperformed. Strategic adjustments could unlock approximately 20 billion francs in additional annual profits.
The Importance of Occupational Pension Schemes in Switzerland
For many individuals in Switzerland, the assets accumulated through occupational pension schemes represent a significant portion of their overall wealth. Currently, these savings have reached an impressive total of 1,200 billion francs. This capital is not just sitting idle; it has been effectively invested, yielding returns of 600 billion francs since 2004, which translates to over 100,000 francs for each insured person.
Michel Bossong from the Asset Management Association Switzerland (Amas) notes, “A large segment of the population primarily invests in the stock market through the second pillar. The pension fund not only alleviates the lack of investment knowledge but also compensates for limited risk tolerance.” For many with minimal savings, purchasing stocks on their own can be a daunting financial challenge. However, by pooling resources within the pension scheme, these individuals can afford to take on more substantial risks.
Enhancing Returns through Strategic Adjustments
Despite the success of the current pension model, a recent analysis by Amas, in collaboration with consulting firm WTW, suggests that Swiss pension funds have the potential to achieve even higher returns. By refining their investment strategies within a defined risk framework, they could see an additional annual return of 0.3 to 0.5 percent, largely through improved diversification.
The study also highlights a second opportunity for enhanced returns: increasing the risk budget. Bossong points out that many funds have accumulated significant reserve cushions, allowing them to withstand greater value fluctuations, which could lead to higher returns—estimated to be around 0.95 percent per year.
Implementing these two strategies could boost annual profits in occupational pensions by approximately 20 billion francs. This finding aligns with prior analyses, including a study conducted by McKinsey, which found that pension institutions in countries like the Netherlands and Canada have achieved notably higher long-term returns compared to their Swiss counterparts.
One primary recommendation from the Amas study is to reduce the bond allocation in pension fund portfolios, as 28 percent of assets are currently tied up in bonds. With interest rates for ten-year Swiss government bonds plummeting to just 0.4 percent, reallocating these funds to stocks or alternative investments like private equity could yield better returns.
Interestingly, the Amas study also suggests that pension funds should reconsider their focus on Swiss investments, a phenomenon known as home bias. Although pension institutions collectively hold stocks worth nearly 400 billion francs, over one-third of that is concentrated in the Swiss stock market. Different funds exhibit varying degrees of home bias; for instance, the personnel pension fund of the Canton of Zurich has invested only 11 percent in Swiss stocks, whereas the pension fund of the Swatch Group allocates 59 percent.
The analysis further reveals that funds with a strong home bias have underperformed, earning 0.39 percent less per year compared to those that invest more heavily in foreign markets over the last decade. This trend is echoed in bond performance, where a similar comparison yielded a 0.4 percent annual performance gap.
Bossong explains, “It’s common for investors to gravitate towards domestic securities due to familiarity. However, this home bias can lead to concentration risks that diminish overall diversification.” This sentiment is supported by recent research from Basel professors Pascal Böni and Tim Kröncke, which found that home bias in 43 pension funds resulted in a cumulative underperformance of 21 percent over ten years.
Last year’s lackluster performance of the Swiss stock market—growing only 6 percent compared to a 25 percent increase in US stocks—highlights the risks of such bias. Over a decade, the global stock index MSCI World posted a remarkable gain of 102 percent, while a purely Swiss stock portfolio rose by only 76 percent, even when accounting for currency fluctuations.
While acknowledging the high valuations of US technology stocks, Bossong suggests that the more defensive Swiss stocks can offer protection during market downturns. He does not advocate for a drastic shift away from domestic investments but believes that Swiss pension funds have laid a solid foundation and could afford to take on slightly higher risks. Nevertheless, he emphasizes that there remains an opportunity for improvement, with a few strategic adjustments potentially unlocking additional billions in returns.