BASEL, January 28, 2025 - In a study commissioned by AMAS, the consulting firm WTW analysed the risk capacity of Swiss pension funds in connection with investment strategy and return potential for the first time. The analyses show: Pension funds often utilise neither their risk capacity nor their return potential. Optimisation of the investment strategies can result in double-digit percentage improvements in benefits for insured persons over a time horizon of 10 years.
The study ‘Risikofähigkeit und Anlagerisiken von Schweizer Pensionskassen’ leads to the realisation that pension funds in Switzerland often have considerable potential for additional returns for the same investment risk. At the same time, many pension funds do not fully utilise their risk capacity, which creates further potential for returns. These are two of the key findings of the study conducted by the consulting firm WTW on behalf of the Asset Management Association Switzerland (AMAS) on the basis of pension fund data covering 61% of all pension fund assets and 67% of all insured persons and 66% of all pensioners. Using a proprietary model, WTW has directly linked a pension fund's risk capacity to its investment risks and return potential. ‘The application of this new model from WTW has made mathematically robust, quantitative analyses of risk capacity possible for the first time ever. This is the basis for determining the optimum, individualised investment strategy. “In addition to selecting the appropriate risk level, optimising the investment strategy for a given level of risk is also decisive for the expected investment returns. Both were analysed in the study,’ says Michel Bossong, Senior Pension Expert at AMAS. ‘With net returns now totalling around CHF 600 billion, investment returns are central to the Swiss pension system. By highlighting additional return potential, AMAS wants to advocate for optimal framework conditions for pension funds in Switzerland.’
According to WTW's analysis, the spread within the pension fund landscape in terms of optimising the return potential while maintaining the same level of risk is quite wide. The 25% of pension funds with the greatest potential for improvement could increase their expected return by an average of 0.84% per year. Over 10 years, such an optimisation would increase the benefits of these pension funds by 11.7% per insured person. Based on the analysis of the investment strategies, there are three measures that pension funds can take to better utilise the return potential: By reducing bonds, by reducing the home bias (the tendency to favour investments from Switzerland) and by building up alternative investments such as hedge funds, infrastructure and private equity. "We calculated the maximum tolerable volatilities of the investment strategies for each pension fund covered," says Christian Heiniger, Senior Director and pension fund expert at WTW. "Most Swiss pension funds keep the investment risk of their portfolios below their volatility limit, which would lead to unacceptable underfunding."
The unutilised risk capacity creates further potential for returns. The 25% of pension funds with the lowest utilisation of their risk budget could increase their expected return by an average of 0.95% per year. Over a period of 10 years, the benefits per insured person could be increased by 13.6%.
The study also looks at the legal requirements for boards of trustees as the highest governing body of a pension fund in the area of conflict between security and return. The law forces the Board of Trustees to perform a balancing act between two contradictory principles in relation to the investment of pension assets: ensuring sufficient security and at the same time generating a sufficient return. Determining the risk capacity of a pension fund and developing, implementing and monitoring the investment strategy are among the non-transferable tasks of the Board of Trustees.
If a pension fund generates significantly less income than would be possible based on its risk capacity, the Board of Trustees is not utilising its discretionary powers in the investment of assets. The study concludes that not only excessive investment risks, but also overly passive or conservative behaviour when determining the investment strategy can constitute a lack of diligence and jeopardise the objectives of occupational pension provision.
The Asset Management Association Switzerland is the representative association of the Swiss asset management industry. It aims to strengthen Switzerland’s position as a leading center for asset management with high standards of quality, performance, and sustainability. To this end, it supports its members in developing the Swiss asset management industry and adding value for investors over the long term. The Asset Management Association Switzerland is an active member of the European Fund and Asset Management Association (EFAMA) and the International Investment Funds Association (IIFA). Founded in Basel in 1992, the Asset Management Association Switzerland currently has almost 200 members. For further information, please see Asset management association
