These are the constantly increasing regulation, the difficult search for qualified specialists and the correct implementation of data protection regulations in relation to cyber security. These are the findings of the latest IFZ study on pension funds.

The new IFZ study «Pension Funds 2023» (german) contains expected and surprising findings on current challenges and future developments in collective foundations and collective institutions. In an interview with Brigitte Succetti, Head Insurances & Collective Institutions at UBS, the initiator of the study, Prof. Florian Schreiber, provides interesting explanations and background information on the results.

Professors Florian Schreiber, Karsten Döhnert and Yvonne Seiler Zimmermann from the Institute of Financial Services Zug at Lucerne University of Applied Sciences and Arts (IFZ) have been publishing the IFZ study on pension funds every year since 2021. They exclusively examine collective institutions (collective foundations and joint institutions, CFJI); the focus topic changes every year and is supplemented by updated key figures such as coverage ratio, interest rate, conversion rate, asset allocation or performance. For the past two years, the authors have also been analyzing numerous offers from CFJI to brokers who are looking for and evaluating suitable pension providers for their clients (SMEs and large companies) as part of the study. The 2023 edition of the study focuses on the current challenges and the tension between growth and financial stability.

Many company pension funds have to give up their independence

Many company pension funds have to give up their independence, not least due to increasing regulation, as the resources required for this can be allocated to too few insured persons, meaning that no economies of scale can be realized. With the increasing complexity of the matter, the task can hardly be managed as a part-time job. The Swiss militia system cannot be professionalized at will, as the collective foundations surveyed also discovered in their affiliations: They often have great difficulty in finding qualified employee representatives for the Board of Trustees.

As Florian Schreiber knows, regulation is the top priority for both collective establishments and communal establishments: among communal establishments, the average score of 4.38 out of 5 is slightly higher than for collective establishments with an average of 4.12. Last year, the average was 3.74 points - so the issue is very urgent for both.

Small CFJI suffer the most

There are significant differences in terms of size. Small CFJI with total assets of less than 1 billion rated regulation the highest with an average rating of more than 4. Medium-sized CFJI (1-5 billion) and large ones (over 6 billion), on the other hand, do not consider regulation to be the greatest challenge. For medium-sized CFJI, it is the shortage of specialists, while for the large ones it is the future development of the financial markets, as Florian Schreiber explains. In 2023, all segments perceived the situation on the financial markets as less challenging than in the previous year (2023 ø 3.78 vs. 2022 ø 3.94). He assumes that CFJI with over CHF 10 billion in assets can benefit from asset management services and have specialized employees - they can therefore deal with financial market risks in a more professional, efficient and targeted manner.

Customers have become more demanding

Growth and financial stability are important for pension funds, as Florian Schreiber goes on to explain. This is because joint institutions must be able to position themselves attractively in competition. This requires economies of scale and synergies - and these are only possible through size, i.e. through growth. The cut-throat competition within the CFJI has ensured that customers have become more demanding. Meeting these demands costs time and money.

Growth should never come at the expense of financial stability, as Florian Schreiber emphasizes. However, this conflict of objectives is difficult to resolve, he admits. Competitive pressure could tempt CFJI to compromise on various services.

For Florian Schreiber, the critical size for collective foundations and joint institutions is around CHF 10 billion in investment assets - although according to pension fund statistics, only 24 out of 1389 pension funds have reached this threshold. Perhaps this is why growth is not the highest priority for all CFJI; for three quarters of medium-sized CFJI, growth is of medium to high importance, but for none of them is it very important.

What potential new connections look for when choosing an CFJI

In the survey, all CFJI segments named «online interfaces for employers» as the second most important differentiating feature for a new connection. Florian Schreiber sees a possible explanation in the fact that potential customers specifically ask for online tools, which is why CFJI place such a high value on this aspect.

In addition, it is probably difficult for most pension funds to differentiate themselves through their financial performance in a difficult stock market year: The regulator leaves little room for maneuver in terms of investment strategies; moreover, CFJI often invest in the same passive funds and consequently achieve similar returns. From an internal perspective, aspects such as online interfaces are therefore important to use the freedom of design to position themselves better against the competition.

Brokers continue to play an important role

A good 37% of CFJI rely exclusively on intermediaries for new business. By contrast, around 20% have their own sales organization and around a third use both channels. Half of all new business at the CFJI was brokered. So brokers are not only important, they also have a lot of power, as Florian Schreiber notes. And he adds: They have become so powerful because they know the CFJI market very well and provide an important service for their customers. In return, they cost the occupational pension funds a lot in brokerage fees and commissions.

How are the CFJI doing in Switzerland?

As Florian Schreiber explains, the rise in interest rates, inflation, the war in Ukraine and the associated turbulence on the financial markets have cost most pension funds a lot of money. In 2021, for example, the coverage ratio of 84% of all CFJI was between 110% and 125%. At the end of 2022, just under half were still within this range. And many have also largely used up their fluctuation reserves.

There is no statistically significant difference between collective foundations and joint institutions in terms of investment risk, performance and coverage ratio. But there is a difference between autonomous and semi-autonomous institutions, says Florian Schreiber: The coverage ratio is significantly higher for autonomous institutions, but so is the range of upward and downward fluctuations. For him, this can only be attributed to a limited extent to the fact that autonomous institutions have a significantly worse ratio of active employees to pensioners than semi-autonomous ones.