Interview with Martin Janssen, published by Michael Ferber in NZZ.
In the recent corona shock, no asset class of Swiss pension funds has made a positive contribution to returns, says Martin Janssen, emeritus finance professor and head of the consulting firm Ecofin. In his view, a significant rise in interest rates has become more likely.
How are the Swiss pension funds doing so far in the corona crisis?
At the end of 2019, Swiss pension funds had an average of 30% invested in bonds, ranging from government bonds to high-yield bonds or emerging markets. A further 30% of the funds were invested in equities, 25% in real estate, 10% in alternative investments such as private equity or hedge funds and 5% in cash. Depending on the marketability of the investments, the type and extent of hedging and the investment vehicle, such portfolios generated returns of between -5% and less than -20% this year. The average is likely to have been around -15% by Monday evening. Meanwhile, there are big differences in the commitments, such as a start-up company with young employees or a fund with a high proportion of pensioners. Depending on what the commitments look like, the losses to date have been insignificant to catastrophic. Panic reactions are not to be observed, however. The slump is often compared to the financial crisis, which has also passed. Most pension funds are sticking to their strategy. In a few cases, rebalancing – the regular return to the strategy – has been suspended.
How large are the reserves of the funds from the good investment years? Are there already threats of shortfalls?
In the case of the private-law pension funds, the economically calculated coverage ratio with correct mortality tables at the end of 2019 was on average 100% in the best case. For this ratio, the calculation of future burdens on the fund is not discounted with a fixed technical interest rate, but rather current market interest rates are used. The actuarial coverage ratio of the pension funds relevant for the annual financial statements was, on average, over 115%. The good years were – correctly – used to adjust to the changed interest rate situation and increased life expectancy. Today, the economic coverage ratio averages around 85%, with large deviations both upwards and downwards.
Have other asset classes partially offset the recent heavy losses of pension funds in equities?
Certain asset classes cannot be valued regularly, such as direct investments in real estate and unlisted companies. The crisis has not yet made itself felt there. But apart from such cases and a few hedge funds, there are no investments that would have made a positive contribution to returns. Since all forms of investment, including real estate and cash, need to be questioned, a broadly diversified and cost-effective portfolio that is precisely tailored to the liabilities is recommended. On the bond markets, illiquid situations with large bid-ask spreads are evident, especially in corporate bonds. This further complicates valuation.
Governments are now launching gigantic fiscal programs, and the central banks are reacting with an even bigger flood of money than they already have. What consequences does this have for the economy and occupational benefits?
In the current crisis, the real sector is damaged in the first round. Fiscal programs won’t help much. What is needed is a reduction in government spending and taxes by about 30%. The flood of money from the central banks is also counterproductive and will further exacerbate the crisis. Everything possible must be done now to ensure that the national and international credit markets do not come to a standstill. The Federal Council’s efforts to set up a credit market for SMEs must be viewed very positively. In particular, international interest rates must be flexible and be able to rise. Otherwise, the international exchange of goods, which is particularly important today, will be stifled. If the framework conditions are good and not all countries are affected at the same time, the economy can help itself and spread the damage over several years.
Will interest rates now be pushed even deeper into negative territory? Are negative interest rates threatening for a long time to come?
Interest rates are likely to fall temporarily. But a significant rise in interest rates with a high degree of variability according to debtor quality has become more likely because of this real shock and would be helpful in overcoming the crisis. This would be tantamount to inflation, which the huge money supply is just about to meet. Given the current level of bonds in pension fund portfolios, it is unlikely that such losses can be averted.
In recent years, many Swiss pension funds have already significantly reduced the conversion rates and thus cut pensions. What should savers and pensioners be prepared for in the coming years?
It would be wrong to make far-reaching decisions in the middle of the crisis or to adjust a well supported strategy. When the crisis slowly subsides, it is time to assess and evaluate the damage. It will then be impossible to avoid bringing the big losers – the working population – and the big winners of the crisis – the pensioners – to one table and working out a fair solution. Since other major decisions will then have to be taken – e.g. a partial return to a risk-adequate international division of labour – solutions in the pension sector will be easier to find than just a few weeks ago.
Translated with deepl.com