The World Trade Organization’s (WTO) e226m defined benefit (DB) pension scheme is both aggressive and unique. Aggressive in the sense that it has 70 per cent of its assets in equities, and unique in that, as an international organisation, it is not governed by the Swiss pension regulator. Being self-regulated, it can operate independently, setting its own solvency targets and benchmarks.

The scheme itself is relatively young. It was founded in 1999 following the split from its former parent scheme at the United Nations. Since then, the scheme’s assets have risen from SFr140m (e86m) to SFr365m, much to the pleasure of its 700 participants and 110 beneficiaries.

Robert Luther, director of administration and general services division at the WTO, explains that the fund’s unique profile allows him to implement a different strategy from other funds.

He says: “As it was a young plan, our consultants suggested that we could be slightly more aggressive in the early years because we didn’t have much in the way of liabilities – we had no pensioners when we started.”

As mentioned, the fund has a 70 per cent allocation to equities. Of that, 60 per cent is in global equities with 10 per cent in emerging markets. The remainder is made up of a 20 per cent allocation to global bonds and 10 per cent to indirect real estate. The real estate was a new addition to the fund, which came three years ago. The property is all commercial European, mostly in the UK, Germany and France. The fund is not yet ready to buy emerging European real estate, but is monitoring the market for opportunities.

Mr Luther explains that the fund is trying to get into a Swiss real estate foundation, but is frustrated by a waiting period that he says is between two and three years. The asset class is very popular among Swiss pension funds, which has made access difficult.

He says: “It’s horrendous. It’s a very attractive product, but when we last reviewed the strategy and decided we wanted Swiss real estate, we couldn’t get in. We waited for some time, but ended up deciding we couldn’t wait any longer.”

The fund has two mandates for its global equity holdings, one appointed bond manager and a manager for its emerging market equities. It also has two real estate managers, but the fund would not reveal any names.

In 2007, the fund returned 4.4 per cent, a relatively good performance compared to most funds in Switzerland. While this was down from 2006’s figures of 7 per cent, Mr Luther does not appear worried.

He says: “We have a target real rate of return of 3.5 per cent. But that’s a long-term target. We started at exactly the wrong time because we were fully invested by mid-2000 and then everything crunched so we had two very bad years, which weigh very heavily on our overall performance.”

The WTO is about to begin a review of its strategy, and this could significantly affect the direction and allocation of the fund. Mr Luther indicates that the fund has concerns over mortality and salary increase assumptions, and says the required contribution rate could also rise significantly.

He also hints that the fund could trim its exposure to global equities. This would mean increasing its allocation to bonds or real estate or possibly another non-correlated investment class. While Mr Luther rules out derivatives, he expresses interest in commodities and private equity.

However, unlike a growing number of Swiss schemes, this does not mean the fund intends to make the DB to defined contribution (DC) switch anytime soon. The fund’s coverage ratio is not ideal either (below 90 per cent), but Mr Luther dismisses the notion that it would become too expensive and said a move to DC would be strongly resisted by staff.

He says: “We had to have a DB plan because we were leaving the UN fund and the staff wanted to have something that was as close as possible to what they’d known before. A DC scheme doesn’t lend itself to our remuneration policy because we don’t offer significant one-time bonuses, for instance. It’s a very traditional civil service type of scheme.

“[The coverage ratio] is not a matter of great concern to us because it is so heavily influenced by two or three bad years – 2002 and 2003 in particular. We use what we call an open group valuation instead of a closed group valuation. In other words, we assume that life goes on indefinitely for the WTO, and the idea of having to wind up the plan is not a strong possibility.”

Such an aggressive asset allocation is certainly rare for Switzerland. Much of this has to do with the fact that the WTO fund is self-regulated and does not need to pay attention to the Swiss regulator, or any other regulator for that matter.

Mr Luther explains: “We’re not subject to Swiss law. We’re not a foundation. We are an inter-governmental plan subject to international law. We’re so exposed to equities because we don’t have the constraints of Swiss law.”

But that does not mean the fund can invest as it chooses. For example, the fund does not allow itself to invest in derivatives and there are soft limits in place on investments.

However, it is still largely able to play by its own rules. Under Swiss law, the fund would only be allowed to invest 40 per cent of its assets in equities.

This year could certainly be an important year for the young fund. Much will depend on its strategic review and evaluation that will kick off in earnest towards the end of 2008. In the meantime, however, the fund remains aggressive with a portfolio full of equities.

• Location: Geneva, Switzerland
• Assets: E226m
• Active members: 810

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