Pension funds and monetary policy: Between burden and opportunity
On June 19, 2025, the Swiss National Bank (SNB) lowered its policy rate by 0.25 percentage points to 0.0%. This marks the second rate cut this year (fifth since June last year) and signals that the SNB is once again reacting more actively to cooling inflation and ongoing upward pressure on the Swiss franc. SNB President Martin Schlegel cited the subdued inflation outlook—current projections for the year are just 0.2%—as well as a globally uncertain environment. At the same time, the SNB made clear that while further monetary easing may be considered if necessary, it is hesitant to re-enter negative interest rate territory. From the perspective of pension funds, this caution is understandable.
The era of negative interest rates between 2015 and 2022 was undoubtedly a challenge for Swiss pension funds. On their liquid assets—held to meet short-term liabilities—they had to pay annual negative interest, resulting in direct costs estimated at around CHF 2.4 billion over the period. In addition, fixed-income investments, particularly Swiss bonds, lost significant earning potential, putting structural pressure on long-term planning and funding stability.
At the same time, this period served as a catalyst for many pension funds to rethink their investment strategies. To compensate for the declining returns of traditional asset classes, numerous institutions broadened their diversification and adopted more professional investment approaches. While the average share of Swiss bonds stood at nearly 23% in 2014, it fell by more than 5 percentage points over the following decade. Meanwhile, allocations to equities, real estate, infrastructure, and alternative assets were significantly increased in many cases. This shift not only enabled higher long-term return potential but also contributed to a modernization of investment strategy. Larger pension funds with professional asset management were able to benefit from new asset classes and international diversification opportunities. In the long run, this transformation strengthened not only return prospects but also resilience to market fluctuations.
With the most recent interest rate cut, a core asset class for pension funds has again come under scrutiny: Swiss government and corporate bonds. While these instruments are considered relatively safe, they currently offer only very low or even negative real returns. Many pension funds are now asking whether, and to what extent, they should continue to reduce their exposure to domestic bonds—a trend already visible in recent years.
Although a complete exit from Swiss bonds is unlikely, greater selectivity is expected, especially for new investments. A key question is the opportunity cost compared to higher-yielding international fixed-income securities. The range of alternative credit instruments is broad and offers compelling investment opportunities—though these require careful consideration of currency and credit risk. What’s clear is that low interest rates in Switzerland are forcing pension funds to make increasingly complex strategic decisions when allocating their core portfolios.
The end of the negative interest rate policy in 2022 was widely seen as a relief for pension funds. The SNB’s current decision to cut rates again—without crossing into negative territory—is likely to be interpreted as a balanced and cautious approach.
Nevertheless, for pension funds, the key question remains how to position themselves strategically in a persistently low interest rate environment. In particular, the role of Swiss bonds is once again up for debate. While these instruments have historically served as a stable foundation for portfolio allocation, they currently offer little to no real return—casting doubt on their stabilizing function. As a result, many funds will need to consider whether to reduce their domestic bond holdings further, adopt more selective approaches, or increasingly substitute them with higher-yielding foreign investments. This, however, requires careful management of currency, credit, and liquidity risks.
The SNB’s monetary policy not only affects financing costs in the short term, but also shapes the structural investment decisions within Switzerland’s second pillar. The coming years will demand a more differentiated approach to interest rate risk, real returns, and regulatory requirements—calling for a high level of professionalism and strategic agility from pension institutions.
