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Finance crisis blows hole in pension funds

Will financial turbulence affect the pensioner's shopping basket?


Swiss occupational pension funds have lost around SFr30 billion ($28 billion) this year due to the financial crisis, but the industry says it can absorb the blow.

Some experts, however, put the losses at closer to SFr60 billion – or ten per cent of the total funds – in the past 12 months, which could rise even more if stock markets continue to decline.

Swisscanto, one of Switzerland's largest pension funds, presented a comprehensive report on the state of the industry at a conference in Zurich on Wednesday. It said that funds had lost some five per cent of their value in the last eight months.

It compared the current financial turbulence to the last crisis in 2001-2002, but insisted that funds have easily enough cash reserves to guarantee payments to the retired.

The report said that the average cash ratio of Swiss pension funds – a key performance indicator – had dropped from 109 per cent to 103 per cent from January to August this year. A ratio of more than 100 per cent signifies that the fund has more assets than liabilities.

"Pension funds have naturally been hit by recent developments, but there is no reason to panic," Hanspeter Konrad, director of the Swiss Pension Funds Association, told swissinfo. "Snow in April does not point to a new ice age."

"It is important that we take a long term perspective rather than focus on short term trends. Pension funds have come through this type of difficulty well in the past."

International comparison

However, Willi Thurnheer, a retirement specialist at Mercer Investment Consulting, believes the losses could reach up to SFr40 billion by the end of September – a particularly turbulent month for the financial markets.

"If the markets continue to go down for the rest of the year then we would expect a lot of funds to be at least slightly underfunded," he told swissinfo. In such a case, funds would have to take measures to get back into the black, such as increasing contributions, he added.

But Thurnheer pointed out that pensions are guaranteed by a state safety fund that would take up the burden in the case of an emergency, but perhaps without some of the returns people would have been expecting.

He also said that Swiss pension funds compare well with international equivalents because of strict laws that force them to set aside adequate funds.

Black picture

Martin Janssen, a professor of finance at Zurich University, painted an altogether blacker picture for future Swiss pensioners. He estimated that the industry has lost up to SFr60 billion in the past 12 months.

But he was more concerned with the methods that funds employ to determine the size of their liabilities.

Janssen believes that people will live longer than the industry currently predicts. And he also thinks pension companies overestimate how much they can make their funds grow.

"The figures [assets versus liabilities] look fine today, but in the future they will look bad. Somebody will have to pay for that, and that will be today's workers," he told swissinfo.

swissinfo, Matthew Allen in Zurich

Pension fund health study

Swisscanto surveyed 427 pension funds in Switzerland, managing combined assets of SFr422.1 billion for 2,343,807 clients.

The report said that cash ratio – or asset surpluses – had fallen 7-9% since the end of 2007, but that the average occupational pension scheme was still in the black.

The composition of investments used by managers to increase the size of the fund has changed in recent years.

In particular, funds invest more money now in foreign property and alternative investment vehicles such as hedge funds.

New laws about to come into force will allow funds more room for manoeuvre in choosing the right type of investments. This was welcomed by the industry, but it criticised rules that set a minimum target for returns people could expect on their pension investments.

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