Insured persons benefited from the good investment result in 2023. Pension funds earned an average interest rate of 2.2% on employees' pension capital. The 1st quarter of 2024 also began positively. Meanwhile, conversion rates continue to fall.
2023 was a volatile investment year for pension funds, characterized by geopolitical tensions and the further tightening of monetary policy. On average, pension funds achieved a return of 5.3% last year. The year 2024 also got off to a good start. Equities in particular were able to seamlessly build on the previous year-end rally. Pension fund investments posted a return of +2.8% in the first four months. As a result, the average coverage ratio rose from 107.9% at the end of 2023 to 110.2% at the end of April 2024. 2.2% interest was paid on employees' pension capital in 2023, which is above the BVG minimum interest rate of 1.0% set by the Federal Council. By contrast, the conversion rate is at an all-time low and will continue to fall in the coming years, as the experts from the consulting firm Complementa explain in their pension fund study «Risk Check-up 2024».
Pension funds rely on a global and broadly diversified investment mix
While a shift in asset class weightings from liquid investments (primarily bonds and equities) to illiquid investments (primarily real estate) was reported in the previous year due to the negative performance, this was reversed in 2023 due to the strong performance of the bond and equity markets. At 31.1%, the equity ratio at the end of 2023 was a good 1.6 percentage points higher than the previous year. The weighting of fixed-income investments (including liquidity) rose by 0.4 percentage points to 36.7% within a year. Despite a decline, the real estate ratio remains well above 20% (currently 22.8%). Alternative investments have also remained close to 10% in recent years (currently 9.4%), with private equity, infrastructure investments and private debt in particular demand. The 2nd pillar invests every second franc abroad. This corresponds to the level of recent years, whereby it hedges currency risks to a large extent. The remaining foreign currency risk currently amounts to 17.6%.
Technical interest rate is partially adjusted upwards again
In recent years, technical interest rates (implicit interest rate promises for pensioners) were reported to be significantly higher than the effective interest rate level. The gap has narrowed in the last two years due to the rise in interest rates. This is a positive finding, as the pension funds once again have more leeway in setting the technical interest rate. Last year, for example, there were also pension funds that adjusted this interest rate upwards. The current technical interest rate is 1.78% on average, whereas last year it was still calculated at 1.71%.
Conversion rates continue to fall
In addition to the interest rate level, pension funds are confronted with the increase in life expectancy of the population. The long-term trend is continuing: at an average of 5.2%, the conversion rate in 2024 will be almost 0.1 percentage points lower than in the previous year. The pension funds are thus moving further away from the BVG minimum conversion rate of 6.8%, which does not sufficiently take into account the increase in life expectancy in particular. The actuarially correct conversion rate with a technical interest rate of 1.75% is 4.8%. A conversion rate that is set too high leads to retirement losses that younger age groups have to pay indirectly through lower interest rates. Pension funds have already decided on reductions for the next five years to counteract this redistribution. As a result, the average conversion rate is likely to fall to 5.0% by 2029.
Complementa estimates that pension funds must currently generate a return of at least 2.0% per year in order to maintain a constant coverage ratio. Complementa also expects that pension funds with the current investment mix can expect a return above this target value in the long term. Short-term fluctuations can never be ruled out.