Ensuring that Switzerland's AHV pensions are transferred on time at all times is one of the responsibilities of Compenswiss. The independent federal institution under public law also counts on the services of the financial market, whose pulse Compenswiss President Manuel Leuthold can feel particularly well. In an interview with finews.com, he reveals what particularly strikes the weighty institutional investor at the moment.
Mr. Leuthold, Compenswiss is responsible for managing the AHV, IV, and EO compensation funds. In the past investment year, assets under management shrank by almost 13 percent to 37 billion Swiss francs ($42.9 billion). This slump was greater than the average for pension funds, which often invest similarly.
That's correct. The results were very disappointing in 2022, especially since diversification between the various asset classes didn't play along. The fact that bonds lost about 15 percent because of the interest rate turnaround was very exceptional. But it was clear that after the long years of falling interest rates with rising bond prices, the bill would have to be paid at some point.
You refrained from selling last year. Did you simply want to sit out the bear market?
We monitored liquidity very carefully and didn't have to sell any securities at a low point. The most important thing was that, as a major investor, we were able to avoid selling investments at the worst possible moment because of liquidity shortages. This was different in the past when we aligned our risks more closely with market volatility.
Has the situation eased somewhat in the meantime?
At the end of May, our portfolio generated an investment return of around 3 percent, which indicates a normal investment year. This is also in line with our main scenario of a continuation of slow growth, to which we assign a 50 percent probability.
Unlike a pension fund, we are a reserve fund
The other two scenarios, at 25 percent each, point to either a significant deterioration or significant improvement in the financial markets. We still have few clear indications of where the journey will ultimately take us.
The breakdown of asset classes did not change either. They hold around 55 percent in bonds, 25 percent in equities, and 15 percent in real estate. This puts them close to a classic 60/40 portfolio. Is that the right investment strategy in these changing times?
In recent years, we have increased our real estate allocation somewhat at the expense of bonds, but we are well positioned with our current strategy.
However, you would have plenty of scope for adjustments.
That's the way it is. Unlike a pension fund, we are a reserve fund. With the exception of changes in the political environment, we have no binding obligations. And we are also free on the asset side in that we do not have to comply with any investment regulations, such as the occupational pension fund with the BVV2 ordinance. On the other hand, one important restriction compared with other institutional investors is our investment horizon.
Please explain.
To ensure that pensions are paid out under all circumstances, we have to be very careful not to hold too many illiquid investments. That limits our investment horizon.
Our home currency is a handicap
Incidentally, the fund was greatly helped by the adoption of the AHV21 bill which equalized the retirement age for men and women. Because the deficits in the AHV will be absorbed for some time, the investment horizon at Compenswiss has been extended by 10 years. This gives us scope to tap into the private debt sector, which is new to us.
How do you go about investing in these or the other asset classes?
Neither the Investment Committee of the Compenswiss Board of Directors nor the Investment Committee in the Executive Board makes decisions on stock selection. Instead, we issue mandates for all asset classes. These are, on the one hand, external mandates, if an asset manager has special expertise, and on the other hand, internal mandates, which are mostly used for passively managed categories.
As a large investor, you cannot accommodate all the funds seeking investment in the domestic market. How do you go about investing abroad?
When we invest abroad, we can improve diversification. But at the same time, we have to keep in mind that our home currency is very strong. The Swiss franc has appreciated by an average of 1.5 percent a year for 50 years. We can overcome this handicap, provided our investments abroad generate significantly higher returns than the expected currency losses due to our hard currency.
You are repeatedly criticized for giving much more weight to social aspects than to ecological ones when it comes to sustainable investing.
I understand the criticism. But it's put into perspective when we remember Compenswiss' statutory objectives of liquidity, security, and return. First and foremost, we must ensure that pensions are paid out at all times with existing funds. In addition, we must safely invest the surplus funds in the compensation fund and thus generate a return in line with the market.
We make no concessions about ecological requirements
By contrast, we do not have any legal requirements regarding climate protection or other socio-political concerns. We, therefore, do not make any concessions about environmental requirements if they're at the expense of pension security. Incidentally, climate risks are included in the assessment of our portfolio like other risks, and we also invest in an ESG-compliant manner.
In other words, ecological investing is only worthwhile to a limited extent.
The simple fact is that «green» investment products don't always yield better returns than conventional investments. If Compenswiss had shed all its positions in oil, it would have foregone an income of 200 million francs last year. Excluding these investments is not reasonable concerning people who depend on an AHV pension.
ESG-compliant investing also involves taking a close look at governance. You've decided to systematically exercise your voting rights in Swiss investments. When was the last time Compenswiss opposed the recommendation of the board of directors at a general meeting?
In 2022, we attended 95 AGMs of Swiss companies, and 71 percent of the proposals of the boards of directors were accepted. Abroad, we currently refrain from actively exercising our voting rights for administrative reasons and because of the costs involved.
Like Compenswiss, the Norwegian sovereign wealth fund is owned by the state and has no investment restrictions. It sees itself as an index-tracking investor and has around 70 percent of its assets invested in global equities. Is there anything you can learn from this?
The starting position of the world's largest sovereign wealth fund, with an almost infinite investment horizon, is not comparable to our reserve fund. In contrast to the growing Norwegian fund, our investment volume will only increase by about ten billion Swiss francs over the next five years.
We need a Swiss commercial bank as our main partner
After that, it will fall steadily again because of the aging population in Switzerland. Unlike the sovereign wealth fund, we cannot collect a time premium.
Recently, you said that Credit Suisse is an important counterparty for Compenswiss. What will change now that the bank has been integrated into UBS?
Our vaulting business is very significant and moves billions. We now have to adjust to the fact that Credit Suisse may be eliminated as an important counterparty.
Who could step into the breach?
Except in foreign exchange trading, we need a Swiss commercial bank as our main partner. Fortunately, we already have a broad network of banking relationships and also work with the Swiss National Bank.
As a large institutional investor, what are the most important requirements you have for the Swiss financial center?
Part of our risk is working with banks whose soundness could suffer. That's why, on the one hand, we need a broad-based and strong banking system. On the other hand, high-quality services are important, including reporting.
Speaking of solidity: To what extent did the emergency rescue of Credit Suisse with the help of state intervention using emergency law discredit the Swiss financial center?
The fact that Switzerland had two big banks was a big plus. In retrospect, however, the merger was the best solution, especially since it was put together very quickly.
Things could get tricky for medium-sized companies
That's why I don't think the financial center will suffer any permanent damage from the emergency rescue. In terms of competition, we also have enough competition in retail banking.
But for Compenswiss, competition in other segments is crucial.
Not only for us. It could be particularly tricky for medium-sized companies that want to raise capital in Switzerland but would have to switch to foreign countries in the future.
Let's take a look at the state of the AHV. Despite the equalization of the retirement age for men and women, Switzerland's most important social security system will soon be running chronic deficits again. How can they be eliminated?
There is a consensus in Switzerland that AHV benefits should not be cut. That's why additional funds are needed. A 1 percentage point increase in wage contributions would generate about 3.5 billion in additional revenue annually, and a 1 percentage point increase in value-added tax would generate about 2.5 billion. As a third option, the retirement age could be adjusted, with an increase of one year for all genders generating about 2 billion annually for the AHV. Which path is taken is in the hands of politicians.
However, a genuine will to reform is still not discernible in politics. This paralysis is also reflected in Compenswiss.
After all, two reform steps have been taken with the STAF and AHV-21 proposals.
There is no magic
This has bought us a few years and we're not under pressure.
What do you see as the most critical and fairest solution beyond this paving stone policy?
There is no magic. What is certain is that every solution hurts.
But according to worry barometers, the younger generation fears that there is no solution for them at all.
The lack of confidence among the young is indeed regrettable. But in Switzerland, we have always found good solutions when the pressure has been felt. That's why I remain optimistic.
What do you personally associate with the term pension?
I am a banker who has managed funds for wealthy individuals. But my work for the Swiss social security system is at least as satisfying. I'm particularly fascinated by dealing with demographics, which are hardly noticeable at first, but have all the more powerful effects over the long term. That is why I will be standing for a third term at Compenswiss at the end of the year.
Manuel Leuthold was appointed Chairman of the Board of Directors of Compenswiss (Ausgleichsfonds AHV/IV/EO) by the Federal Council as of January 1, 2016. Since 2016, he has been an independent board member and holds various mandates mainly in the banking, asset management, and real estate sectors. He spent four years as Group Chief Administrative Officer at Edmond de Rothschild Group and before that spent 27 years in the service of UBS, including on the Executive Board of UBS Switzerland. Leuthold graduated in law and economics, each with a master's degree from the University of Geneva.
