Report 2022: "The 3rd contributor: long-term performance counts"

Pension fund assets - sharp correction is a wake-up call for reforms

The 2022 investment year led to a significant decline in the assets of Swiss pension funds. The performance loss of 9.1 per cent does not detract from the fundamental role of the third contributor to the BVG occupational pension scheme. On the contrary: in order to further improve the potential of the 3rd contributor, reforms must be tackled - as shown in the report "The 3rd contributor: long-term performance counts" (only in German).

The way to achieve the objective

In order to assess the strength and efficiency of our pension funds, it is worth taking a look beyond our borders and comparing the situation with pension funds abroad. With regard to framework conditions, a closer look at investment regulations in countries comparable to Switzerland shows that legal regulation in the form of investment limits is increasingly being replaced by the Prudent Investor Rule. This principle, which originates from Anglo-Saxon legislation, regulates the conduct of the responsible institution and its bodies throughout the entire investment process. It is already considered a successful model by asset managers, banks and fund management companies, but also by numerous professional pension funds in Switzerland and the EU. In the following, the Prudent Investor Rule will be briefly explained and then it will be illustrated how the 3rd contributor could be strengthened with its help.

Prudent Investor Rule

The Prudent Investor Rule is a legal guideline for investors. The Prudent Investor Rule focuses on adequate risk management, transparency in the investment strategy and access to investment options, regardless of the investment class. The rule is already largely part of the OOB2 today, but it does not take effect as desired.

With the consistent application of the Prudent Investor Rule, modern regulatory framework conditions are created and investment decisions by pension funds will in future be made on the basis of fundamental economic principles. This allows pension funds to exploit the entire investment universe more flexibly in favour of higher returns.

The focus on the Prudent Investor Rule in the OOB2 includes, on the one hand, the abolition of the existing investment restrictions and, on the other hand, the strengthening of various steering instruments, which to a large extent are already part of the OOB2. These are as follows:

  • Fiduciary duty of care
  • Diversification of investments
  • Alignment of the investment strategy with return/risk requirements
  • Risk assessment in the context of the total investment assets
  • Monitoring of investment activity and results
  • All actions in the interest of the capital providers, i.e. the beneficiaries
  • Optimisation of asset management costs
  • Where necessary, delegation of asset management tasks to specialists

However, in order to meet the requirements of the Prudent Investor Rule, especially for more complex alternative investments, further measures are needed. For example, the investment decisions of the responsible asset manager must become more transparent in many respects. In particular, there needs to be transparency of the effective investments and returns, transparency of the valuation methods and assumptions, transparency of the entire investment process, transparency of the investors themselves and also prior transparency of the costs.

In addition, the risk management of the pension funds must be further professionalised in order to create an environment that enables efficient and targeted management of the pension fund assets. This can be achieved by defining the investment strategy taking into account the risk capacity, by implementing the investment strategy within the framework of the risk budget and by monitoring the investment activity and compliance with the risk budget. This strengthens the role of the 3rd contributor and generates a sustainable contribution to the national economy.

Smaller pension funds in particular will hardly be able to achieve such a level of transparency and adequate risk management on their own - some of them have therefore excluded attractive but complex investments in the past. This is why, according to the Prudent Investor Rule, they can and should increasingly call on the help of specialists in the areas of investment and risk management in the future. The know-how for this is available in the Swiss financial centre with its asset management firms supervised by FINMA.

The 3rd contributor can do more

An international comparison of the investment performance of Canadian and Dutch pension funds shows that the 3rd contributor can generate more than 40% of the annual pension fund income. However, for this to be achieved, pension funds must be able to play the full range of investment options. This requires behavioural changes at many levels, only then can the entire investment universe be used for the benefit of the insured. In concrete terms, there is a need for action in three areas.

Firstly, the Prudent Investor Rule must be implemented Switzerland-wide. With the introduction of this globally established steering instrument, the legislator now regulates the responsible institution and its bodies instead of the overall portfolio and individual investment categories. This is intended to create the basis for increasing the return on investment assets to a comparable international level and stabilising retirement benefits in the long term and without cuts for insured persons.

However, not only legislative but also self-regulatory measures are needed to create the desired added value for the insured. Therefore, secondly, especially in the case of smaller pension funds, which are often still managed in a militia system, risk and investment management must be professionalised. The asset managers, for their part, must increase the transparency of their investment solutions.

The adaptation of the Ordinance on Occupational Pension Plans (OOB2) to the changed framework conditions is long overdue. For this reason, thirdly, the BVV2 must be revised and the strict investment limits abolished, which on the one hand would increase the pension funds' room for manoeuvre and on the other hand would noticeably reduce the administrative burden.

In order to stabilise the 2nd pillar of our pension system, these reforms are indispensable. Together with other measures, the pensions of future generations can be maintained.