A winning formula

Adam Cadle speaks to Publica CEO Dieter Stohler and deputy CEO/CIO Stefan Beiner about the fund’s recent performance and its ongoing investment and de-risking strategies

The Swiss public pension fund Publica is an autonomous collective institution running 21 mutually independent pension plans, each with its own balance sheet. As at 31 December 2013, the fund consisted of 60,945 active members and 44,796 pension recipients. With total assets of almost CHF 36 billion, Publica is the largest pension fund in Switzerland. Revenues are formed by savings contributions, risk premiums, inflows of vested pension benefits from previous pension plans and buy-ins as well as income earned on pension plan assets. The amount of the savings contributions and any risk contribution from employees are set out in the individual pension plan regulations. Legally, Publica is an undertaking of the Swiss Confederation established under public law with a separate legal personality. Employers that are closely associated with the Swiss Confederation or exercise public responsibilities on behalf of the confederation, a canton or a municipality may affiliate to Publica. On taking retirement, members can choose to draw their pension capital as a lifetime annuity, or wholly or in part as a lump sum.

Looking at Publica’s performance in 2013, how did the fund fare in terms of returns, funding levels and coverage ratios compared to the average Swiss pension fund?

In 2013 the average net performance (after all costs including management fees, transaction costs, taxes, etc) for the 21 pension plans was 3.47% (prior year: 7.94%). The strategic benchmark recorded a performance of 3.23% (prior year: 7.92%), which means that due to its TAA decisions Publica has outperformed the benchmark after all costs by 24 basis points (equal to more than CHF 80 million).

Excluding currency hedging (industrialised countries), the performance would have been 2.45% (portfolio) and 2.13% (benchmark). The investment performance was 3.49% (benchmark: 2.25%) for the 14 open pension plans and 3.41% (benchmark: 3.12%) for the seven closed pension plans (which consist only of retired people).

Publica had a lower performance in 2013 than a ‘typical’ Swiss pension plan because the fund’s SAA had a higher emerging market equity allocation and a lower Swiss equity allocation. Swiss equities posted a performance of +24% in 2013 with emerging markets performing at -5% (in CHF). Secondly, unlike a typical Swiss pension plan, Publica only invests in core countries such as Germany, France and the Netherlands within its EUR government bond portfolio.

Peripheral countries performed better in 2013 and thirdly the fund’s allocation to gold (around 2%) which performed poorly in 2013 is higher than the average Swiss fund. The average annual long-term performance of Publica starting in 2000 is 3.03% (benchmark: 2.80%). As of 31 December 2013, the fund’s total regulatory funded ratio stands at 104.1% (prior year: 105.2%).

Can you describe Publica’s investment philosophy?

Publica’s investment philosophy seeks to systematically exploit correlated risk premiums from a wide range of sources – equity risks, interest rate risks, credit risks, liquidity risks – by means of the broad diversification of its assets. We therefore invest mainly close to or in line with an index, selecting individual products with risk/return profiles that are as clear as their impact on the risk/return profile of the overall portfolio. No adjust-ments were made to the separate strategic asset allocations for the open and closed pension plans during 2013.

Are any de-risking processes to be undertaken in 2014?

Yes, in January 2014 the board of directors adjusted the strategic asset allocation for the open pension plans. The main adjustments are reducing the equity allocation from 33% to 29% and building up an exposure to inflation-linked bonds of 4%, reducing the allocation to bonds CHF and increasing the allocation to government bonds EUR, USD, GBP, CAD, reducing the allocation to commodities from 6% to 4% and (more slowly) increasing the allocation to real estate from 5% to 7% and building up internal know-how to analyse private debt investments (infrastructure, senior secured loans and real estate debt).

Switzerland is currently undergoing a consultation to reform its pensions. As part of these reforms, the conversion rate is set to be cut to 6 per cent. What are your feelings about these changes?

The ‘Altersvorsorge 2020’ reform is a comprehensive package covering pillar 1 (state retirement pension) and pillar 2 (occupational pension funds). From the perspective of the pension funds, the main issue is the reduction of the minimum conversion rate for occupational pensions. A reduction is undoubtedly essential, so 6% is a step in the right direction. We could actually envisage an even lower rate: from 2015 onwards, Publica will be applying a conversion rate of 5.65% at age 65 (to that extent, the reform will probably make little difference to Publica). It is also questionable whether this technical parameter needs to be enshrined in law at all. In relation to the compulsory portion of the occupational pension, the pension contributions will rise in order to make up for the reduction in the conversion rate and keep benefits at more or less the same level. These ‘accompanying measures’ to maintain the benefit level will make the reform package more acceptable to active members as well.

The idea of benefit flexibility and variable pensions has been proposed as a way of ensuring long-term sustainability of pension schemes. Is this something that Publica is considering implementing?

Publica is monitoring developments closely. The central focus of our efforts at present is on adjusting (reducing) the technical interest rate and with it the conversion rate. As things stand, we are not planning to introduce variable pension models.

What is your outlook for 2014 for Publica and for the Swiss pension fund market in general?

Following extensive preparatory work, the board of directors decided on 18 December 2012 to reduce the technical interest rate by 75 basis points with effect from 1 January 2015, to 2.75% (currently 3.5%) for the open pension plans and 2.25% (currently 3.0%) for the closed ones. This move takes account of the reduced income expectations resulting from the low level of interest rates, mirroring the trend in the technical reference interest rate forecast by the Swiss Chamber of Pension Actuaries. In parallel with this is a further reduction in the conversion rate (to 5.65% at age 65 with effect from 1 January 2015). Additional technical provisions of 2.2% annually from 2012 to 2014 are being formed to cushion the impact of this move; the remaining amount will be debited to the income statement in 2015. The Board of Directors has also instructed the employees’ and employers’ representatives in the parity commissions as well as the social partners to commence negotiations with the aim of maintaining the level of benefits. Simultaneously, thanks to the good risk results and on the recommendation of the Pension Actuary, the board of directors decided to reduce the risk premiums with effect from 1 January 2015.

Like Publica, many other Swiss pension funds are currently reducing their technical interest rates. Overall, the situation of the pension funds has improved. Despite the lower technical interest rates and the increased liabilities that go with them, the funded ratio has generally improved, thanks in part to excellent investment results in 2012 and 2013. This has enabled restructuring measures to be halted in a number of areas. However, in many cases the level of the fluctuation reserves is not yet on target. Pension funds are therefore well advised to remain cautious and look to the long term.

Written by Adam Cadle

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