How our pension funds operate today
Pension funds are responsible for managing the retirement assets of individuals in such a way that the pension amounts can be paid out at retirement age. This task is considerably more difficult at the moment due to various factors. On the one hand, there has been a worldwide low interest rate environment for years, which makes it difficult to generate returns on retirement assets. On the other hand, people's life expectancy is increasing, which means that pensions have to be paid out for a longer and longer period of time.
In response to the long-standing low interest rate environment, the minimum interest rate fell to 1.0% in 2019 and has not been raised again since. Rising life expectancy means that pensions must be paid out for longer and longer. Accordingly, the retirement assets and with them the future pension amount shown on the BVG certificate are continuously adjusted to the new framework conditions. The legally prescribed minimum conversion rate for compulsory pension provision of currently 6.8%, for example, which determines the amount of the annual pension as a percentage of the retirement capital, is likely to fall sharply in the future. And with it the future pensions.
The current investment regulations for pension funds are based on the traditional model of investment categories whose share of the total investment portfolio is limited. According to Art. 55 BVV2, no more than 50% of the total assets may be invested in mortgage titles on real estate under building law and building land; ditto no more than 50% in shares, no more than 30% in real estate investments, no more than 15% in alternative investments and no more than 30% in foreign currencies without currency hedging. It should be noted that many pension funds also make use of the expansion option pursuant to Art. 50 BVV2.
This deliberately sets crash barriers for the pension funds' asset allocation. However, this regime of maximum limits is no substitute for adequate risk management. On the contrary, it gives both the legislator and the beneficiaries a false sense of security. Moreover, these limits have an undesirable signalling effect, as they imply that, for example, a share of real estate investments of up to 30% does not pose a particular risk because it is within the investment limits.
Today, our pension funds invest substantial parts of their assets in risk-free interest-bearing investments, especially in bonds denominated in Swiss francs, even though these yield practically no return. According to a Swisscanto study, this share still accounts for 18.7% on average. In 2020, around 32% of portfolios were invested in equities - too small a proportion in view of the past boom years. No wonder, then, that Swiss pension funds as a whole fell short of their return targets. Despite current times of crisis and an uncertain future, it can be seen that equity markets always recover quickly and have a long-term average growth rate of around 8%.
In order for the pension funds to no longer be strongly oriented towards the investment limits, a relaxation or even abolition of these limits would make sense. This would strengthen the Prudent Investor Rule, which is already anchored in the BVV2 today, and the risks could be spread over a large number of investment options. The associated appreciation of the "3rd contributor" would benefit the entire pension system as well as the individual investor in the form of higher returns.