Contiguous Swiss Pension Fund Benchmarks From 31.12.1984

Since occupational pension funds became mandatory at the end of 1984, the latitude of investment freedom for Swiss pension funds has been revised on several occasions.

Banque Pictet, as the leading publisher of synthetic pension fund performance benchmarks in Switzerland have designed numerous benchmark indices to reflect the universe of permitted investments. Today, no fewer than nine Pictet pension fund indices are calculated and published daily, each with a different static asset mix. Readers are referred to the link provided for details of these benchmark compositions. Regrettably, Pictet have removed all statistics of their benchmarks prior to December 31, 1999. However, the data was in the public domain well into the new millenium.

Ironically, in spite if the obvious abundance of synthetic benchmarks relevant for Swiss Pension funds there is now a clear shortage of contiguous time series that reflect the emerging regulatory framework.

In order to address this, Agathos has decided to compute three such series out of the existing universe of Pictet benchmarks. These are shown in Graph-1 below, together with details of their ancestry.

Agathos Contiguous Swiss Pension Fund Performance Benchmarks

In addition to the bird’s eye view of these indices, the tables below show selected metrics, giving a nunemerical profile. The first table relates to the full history since 31.12.1984, the second shows identical statistics, but only since 31.12.1999.

A comparison across both tables illustrates some of the profound changes challenging Swiss pension funds, in part due to financial market patterns, in part arising from the greater freedom of choice given to pension fund managers.

1984 to 31.12.2018

Please note that all three indices reflect one and the same Pictet benchmark (Pictet LPP-93) prior to 31.12.1999.

While back data for Pictet’s ‘2000’ family of indices is (was) available as far back as 31.12.1984, the asset class weightings within in these indices were not yet permitted, making such data rather theoretical, if outright misleading until after 31.12.1999.

The risk/return profiles of pension fund benchmarks in all risk-brackets have undergone dramatic chances with the end of ‘Irrational Exuberance’.  A modest increase in observed risk coincided with lower investment returns from windfall.

Certainly a testing time for Swiss pension funds, or any similar group of institutional investors operating with complex and slow decision making processes, and/or fragile decision-making methodologies.

Since the change of the millennium, pension funds have sought refuge in ever more benchmark-driven investment philosophies, embracing the full impact of deteriorating risk/reward ratios, not realising the inherent hazard of having increased risk exposure (modified investment guidelines), without adequate risk monitoring in place.

1999 to 31.12.2018

While the UBS Pension Fund Index (all funds) is underperforming its older peer, the Credit Suisse Pension Fund Index particularly in 2017 and 2018, it is striking that both aggregate indices underperform the performance benchmarks, except the worst performing one: LPP-C60. That is the bracket with 60% equity weighting. The oddity of this observation is that LPP-C60 is the very index, from which pension fund aggregates (as well as individual funds) show the highest degree of dependency (r-squared), albeit with a very low reading for beta.

Readers are reminded of the tables showing risk/reward profiles of the performance benchmarks. To take unmanaged risks has been very detrimental to investment returns. Pension funds are supposed to be highly risk averse and clearly suffered from either taking too many risks and/or having failed to monitor them.