Switzerland’s pension system and industry appear to be in good shape. Solvency levels are high, assets are growing steadily and many funds are enjoying easing legislation. Some have even managed to change their schemes from defined benefit (DB) to defined contribution (DC) with relative ease. Simply put, an already sophisticated market is evolving even further – making Switzerland an even riper country for asset managers.

Switzerland’s pension fund industry is worth an estimated €445bn, with most of the assets under management in the German-speaking part of the country. This is not to count out the French-speaking side, but with a larger population and more pension funds, the German side is considerably larger.

However, regional differences appear to be lessening. Traditionally, French region funds have been far more aggressive in their asset allocation while the German region was more defensive. There is evidence that this is changing and that the two will become more similar over the coming years.

Take the example of the Geneva-based World Trade Organisation’s (WTO) €226m pension fund. The fund is in the process of cutting its equity allocation, which currently sits at a bold 70 per cent. Its fixed income exposure makes up 20 per cent of assets and the remaining 10 per cent is in non-listed real estate. It would like to take a more conservative approach by increasing its bond and real estate holdings and cutting equities. The fund’s director of administration, Bob Luther, says it might also consider other non-correlated classes.

Meanwhile its Bern-based counterpart, the €20bn government employees fund, Publica, is doing the opposite. Unlike the WTO, Publica is remarkably bond-heavy, with 68 per cent of its assets in fixed income. This was cut from 72 per cent in February. The reduction in bonds was put into equities. Its equity allocation is now 22 per cent and this and a few other asset classes, such as commodities, could increase further according to its director of asset management, Susanne Haury von Siebenthal.

The other significant Swiss trend, and something that is acknowledged by most fund directors, is the shift away from DB towards DC. While this has happened on a larger scale in the German-speaking region, it looks likely that it will affect the entire country.

Along with its move towards a more offensive asset mix, Publica will switch from a classic DB scheme to a DC plan on July 1. Ms Haury von Siebenthal says it was not an easy switch and took much negotiation, but in the end they did not have much of a choice.

Commenting on how the switch was made, she says: “We transfer all active members. It doesn’t change anything for the retired stakeholders, but the new ones will all be changed. So what we do is we calculate the assets for each and every one of our stakeholders and then they will be transferred to the new scheme.”

Over in Zurich, a similar thing is in process with the €13.8bn UBS pension scheme. For the past two years, the fund has begun gradually switching to its own version of a DC scheme, which is more of a cash balance plan. This will open up the fund’s assets to more managers as, currently, 95 per cent of its money is run by UBS.

Its managing director, Christoph Schenk, explains: “We are now transforming the whole structure so that by the end of this year we can start to get external mandates done if we want to and it makes sense. We actually already have the means and ways to give external mandates. We are not bound by UBS as an asset manager.”

Both changes were made because of worsening demographics and liabilities along with lower returns. Publica has a difficult ratio with over 100,000 policyholders and 50,000 retirees along with an economic coverage factor of 87.8 per cent. UBS’ returns have fallen from 12.2 per cent in 2005 to 7.1 per cent in 2006 and 3.9 per cent last year.

Regulations seem to be easing, and these funds are using their improved liability situations to diversify. The Swiss government has also become involved by encouraging funds to have more investment options for their members, hoping that individuals will take more diverse investment choices.

UBS, for example, has assets in 13 categories, though it groups things like private equity and hedge funds into its equity allocation. The fund has admitted that since its risk profile has changed, it is able to expand into more assets, but it says that there is no immediate interest for especially exotic assets such as weather.

However, the main riddle that Swiss pension funds seem unable to solve is that of domestic real estate, a highly sought after asset for the industry. It is in such high demand that some funds have had to wait years to get their hands on even the smallest of allocations.

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