Despite the changing interest rate environment, only about 15 percent of Swiss pension funds plan to substantially increase their allocation to investment-grade bonds in the future. This finding comes from Complementa′s  «Risk Check-up» pension fund study.

Over the past decade of low interest rates, the proportion of fixed-income securities in pension fund allocations dropped from around 40% to just over 30%. In contrast, allocations to real estate and alternative investments have seen a continuous increase. The low interest rates forced pension funds to seek additional sources of returns to address potential funding issues without significantly increasing risk.

Caution in Adjustment

Regular reviews of strategy and Asset Liability Management (ALM) processes at pension funds have resulted in a change of direction, despite rising interest rates. Looking ahead, no significant reallocations are expected.

According to the study, the majority (85 percent) of the pension funds surveyed do not plan to increase their allocation to investment-grade bonds due to higher interest rates.

Hedging Costs and Flat Yield Curves

In the current environment, bonds appear less attractive compared to short-term money market investments, although unexpected interest rate cuts could lead to higher price increases for bonds.

In Swiss francs, a significant drop in interest rates has already been observed. For foreign currency bonds, current hedging costs and the flat or even inverted yield curve negatively impact the investment case.

«Among the pension funds considering an increase, a small majority prefer Swiss franc bonds, even though yields have decreased significantly since the beginning of 2023. For foreign currency bonds, the preference is clearly for corporate bonds, while mixed and purely sovereign bond allocations are not favored in the current environment,» the report states.

Positive Returns and Higher Coverage Ratio

In 2023, Swiss pension funds achieved an average return of 5.2 percent in a fluctuating investment environment characterized by geopolitical tensions and tight monetary policies from international central banks. The interest rate for actively insured members stands at 2.3 percent, exceeding the BVG minimum and technical interest rate, which has risen slightly for the second consecutive period.

The capital-weighted coverage ratio increased from 104.0 percent at the end of 2022 to 107.6 percent at the end of 2023. The number of underfunded pension funds decreased from 8.8 percent to 5.1 percent over the past year.