A new study by global consultancy McKinsey compares the investment results of Swiss pension funds with their Dutch and Canadian counterparts. This comparison has been the subject of discussion for years, Tobias Müller, writes in an essay on finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
The results were hardly surprising, with funds from the Netherlands and Canada performing better on average than their Swiss counterparts – in figures: 0.9 percent and 0.6 percent respectively, taking into account the different long-term investment strategies.
The success factors identified by McKinsey to achieve these higher returns are met by a few very large funds with 50 billion francs and more: They can afford professional structures at all levels, attract experienced and strategically thinking external boards of trustees, can attract talented investment professionals from the asset management industry and have access to a more diverse set of investment opportunities.
«The call for cost efficiency is also repeated again and again but is usually equated with cost reductions»
Thanks to these ideal conditions, very good returns can be achieved, or in other words «net value-added» according to the McKinsey study. One reason for the better returns is the lower cost per franc invested: for example, thanks to internal management or negotiating power vis-à-vis asset managers.
However, the problems described need practical solutions that are geared to the heterogeneous pension fund landscape in Switzerland. For example, criticism of the BVV2 guidelines is only of limited use, as boards of trustees already assume responsibility and 50 percent of the funds fall back on the BVV2 extension article to implement their investment strategy.
The call for cost efficiency is also repeated again and again but is usually equated with cost reductions. Still, this often damages the quality of implementation (indexing inefficient asset classes such as emerging markets or even omitting private markets due to a lack of indexing options). In addition, optimizing existing structures (including external service providers) for cost reasons prevents a more professional approach to management from a total portfolio perspective.
«Investment projects in which several funds pool their negotiating power can be very effective»
So how can the recommendations of the McKinsey study be applied to the Swiss market? It is important to sharpen the focus and concentrate first on the success factors that can be implemented regardless of the size of the pension fund: Structures that promote good investment governance and the formulation of clear investment beliefs cannot be given enough credit and can be improved with relatively simple means.
Examples of this are the development of a long-term investment plan by the board of trustees or increased transparency with regard to investments and investment decisions. Investment projects in which several pension funds pool their resources and thus share their resources and their negotiating power over asset managers can also be very effective. This is already being successfully implemented by some funds and should be further promoted.
«In order to take advantage of economies of scale, funds must grow substantially»
However, many success factors also depend heavily on the size of the fund. The infrastructure for risk management systems and the hiring of several specialists for the internal management of the various asset classes is expensive if there are even enough people on the market. In order to take advantage of economies of scale, funds must grow substantially.
But the path to this cannot simply be copied from other countries. If you observe the development of the pension fund landscape in Holland and Canada, you will see that the regulator has played an important role in each case. In Holland, in particular, the regulator has pushed the consolidation of the number of pension funds by, among other things, strongly promoting the professionalization of the boards of trustees.
«Unlike in Holland and Canada, we do not have a super authority that regulates everything from above»
In the Swiss system, which is characterized by federalism, this is more difficult: unlike in Holland and Canada, we do not have a «super authority» that regulates everything from above. Furthermore, such organizations are not infallible either and sometimes take measures that are impractical and not target-oriented: The call for cost efficiency in Holland, for example, has led to a situation in which no one except the big funds want to exploit the potential of private markets anymore, because of the fear of high costs - despite good net returns: minimizing costs is more important than maximizing net returns.
Consolidation is also taking place in Switzerland and will lead to increasingly professional investment teams ensuring more efficient implementation. But on the way there, and for those funds that are not necessarily willing or able to participate in this development, it is important to find feasible solutions. Building on the investment governance and investment beliefs mentioned above, Swiss funds should focus on the strategic decisions that are important for long-term success, i.e., how to make the best use of their resources.
Tobias Müller joined Corestone’s Investment Solutions division for Swiss pension funds and institutional clients in May 2019. He most recently worked for Mercer in the role of Wealth Leader Switzerland, where he led the team of pension fund advisors. Before joining Mercer as an Investment Consultant, he worked for ten years in various asset management positions, including at GMO, for whom he serviced Swiss pension funds. He is a CFA and CAIA charter holder.
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