According to BVV2 regulation the max is 30%. For equities it is even 50%, if there’s a downward trend in equities it will have an influence as well. That’s why pension funds have an asset allocation, which in theory guards against downward trends in one asset class due to investments in other, uncorrelated asset classes.
None of the pension funds I know (I work for an Anlagestiftung) invests directly in real estate, they do it through diversified funds.
I remembered seeing 35% on one presentation, but I guess my memory fooled me. Thanks for the BVV2 hint.
I asked two providers to send me an overview about the real estates they invest in. One of them send me a map of Switzerland, where they pointed out with dots the cities they have real estate in. The bigger the dot, the more real estate they had in this particular city. I had to ask explicitly for this, because it was nowhere to be found on their website.
Swisslife provided me an offer, and at least told me about some landmark objects why they own.
Thanks for the more detailed information about the diversified funds. Not sure if this lets me sleep better 
I’d ask them, whether they invest in real estate directly or through a fund.
I agree with this point, but another scenario is that central banks keep printing money like they have in the past 10y+ because they can’t afford not to, then share prices can continue to go up in nominal terms because companies have the possibility to increase prices (inflation).
In that scenario I don’t see much upside for bonds, whose price is fixed and yield is ~1%, nor Swiss real estate which is yielding ~2% and rental yields have been decreasing due to the amount of pension funds crowding the sector. If Swiss pension funds typically have >50% in these asset class then they would presumably face a tough time
If money printing slows, long dated bonds and Swiss RE are quite sensitive to interest rate increases (interest rate goes up, pension funds have to revalue assets downwards)
In the end I guess it is about being diversified and not putting all your eggs in one basket.
Q) I genuinely do not know if this is a correct assumption, but for a pension fund that is currently in balance from a funding perspective to be able to credit our personal accounts with more than a 1% return, if they are promising (say) a 6% annuity to current and future retirees, directionally wouldn’t they need to earn more than ~6% return on assets ?
No, they only need to pay the annuity for about 20 years in average based on the current life expectancy. This means that they only need a return of 1.9% to pay out 6% for 20 years.
they pay this until you die. your life expectancy at age 65 is about 20-22 years.
That makes sense - thanks
You need an average return of 3.5%/year to sustain a 6.8% withdrawal for 21 years. If we reduce it to a 6.0% withdrawal, you’ll need an average return of 2.3%/year for 21 years.
Reducing the BVG minimum conversion rate seems necessary at this point. 2.3% sounds totally doable.
Agree on the numbers, still 3.5% return expectation for 21 years is not “alarmingly risky” . On the other hand the effect of coronavirus has changed the life expectancy figures in 2020. not sure if it’s going to have a long term dramatic impact but you never know.
It seems it would not harm me to challenge my own opinion. Thanks for the link.
The reasons behind my thinking are mainly political: pension funds are a part of our retirement and people are very attached to their retirement. I’m expecting political backlash should a medium sized pension fund fail, and expecting them to be deemed “to big to fail” if they met very dire situations. In short, I expect the provisions put in place, regulatory checks, guarantee fund and, in case of need, political mediation to work. Remediation measures still have to occur on occasion, cutting in our assets, and I guess I should separate mandatory minimals (which are still not 100% guaranteed) and over-mandatory contributions and gains, which are less protected.
All in all, I need to study a bit better the existing cases of pension funds who failed to meet their requirements.
Another thing that makes me think I may be trying to comfort myself is that I’d take a different view as an employer, who has to choose a pension fund, as you did, and has to weed out the good ones from the bad ones, than as an employee (which I am) who doesn’t have much of a say in it and just has to roll with the game.
The concern I have is that if we see a bigger crisis, then we might have too many pension funds who are “too big to fail”. Please don’t get me wrong - I hope that this day will never come! I’m just trying to understand the risks involved. I guess if we get to the situation where bigger pensions funds run into problems, we might have a bigger problem anyway.
One thing which I still remember though is how UBS was rescued by the state in 2008 (yes - other banks in Europe were also rescued). That’s a scenario I don’t want to happen again.
Yes, definitely. Unless you have different offers from companies to work for when changing jobs, the options to select a pension fund are quite slim as an employee. It’s still something I would check beforehand, if possible. You don’t want to have 30 or 40% of your life savings being managed by a crappy pension fund.
Holy cow. I just got the message that I’ll get 7.5% interest on my pension fund capital by 31.12.2021.
Doesn’t sound that bad!
Now I am jealous (20 chars)
Don’t be. I only have 10k inside as the bigger part of my 2nd pillar is at ValuePension lol.
I am about to buy 80K into my underperforming fund, wish we could switch to yours. Is it perhaps the case that you have a special deal as IIUC you work in finance?
Our pension fund just surpassed the cover ratio of 130%. That’s why (plus the market returns) they decided to increase the interest so much this year. It was around 2-3% in the last couple of years.
Too bad I won’t get that much of it. Imagine how those feel that are close to retirement (with 1-2M in assets).
Anyone have perspective what coverage ratio is deemed “very high” so the fund would credit employees with higher interest?
Our coverage ratio was 115% end 2020. Investment performance in 2020 was about 6%. They credited employees accounts 2%. 4% of total assets were put aside for changes to actuarial provisions.
Which funds are that?
I assume it really depends on the pension fund and we might not be able to set a general rule about bumper returns being paid out.
The tone of the communication from my pension fund (Muti National) feels quite different vs. @TeaCup or @Cortana . It has earned median ~6% return on investment over the past 10 years and has consistently credited 2-3% interest to members in good performance years and bad.
This year they issued a communication to employees about the challenges of all-time low levels of interest rates and increasing life expectancy. They announced a cut the conversion rate and an increase in employee and employer contributions. (They did also compensate older members for the cut in conversion rate)
Based on the above it would be a big surprise if they changed messaging and increased distribution significantly in the next few years
Just got the official numbers: 3.00% on mandatory and 5.00% on the extra-mandatory. They have 115% coverage ATM.