Swiss Federal and Cantonal Pension Fund Performance Overview

The median return of public pension funds for the year 2019 is virtually identical to that of all Swiss pension funds. Within the sample, there are meaningful differences, which is quite normal.

Last year, the pension funds of Glarus (GL), Zug (ZG) and Vaud (VD) have performed best. At the tail end one finds the pension funds of Luzern (LU), the Federal fund (Publica), and Graubünden (GR). But such short-term rankings are not particularly stable, or meaningful.

Either way, only the pension fund of Glarus has performed better (marginally) than LPP-C40, the medium risk-tier index.

This chart displays a ranking of annualised returns over three years. The group of pension funds found on top of the list is the same as for the year 2019. At the tail end we discover some minor changes in rank. The three years include a down year (2018) and in down years, pension funds tend to outperform. This phenomenon contributes to six funds performing better than LPP-C40 over three years, some only fractionally so.

A majority of funds was able to out-perform the lower risk-tier benchmark.

Six years is currently the longest possible record that includes all funds in this monitor. The Federal pension fund is the poorest performer of the group. Only the pension funds of Glarus (GL) and Zug (ZG) have exceeded LPP-C40.

Four funds – Publica, Appenzell IR, Graubünden (GR), and Schwyz (SZ) show returns lower than LPP-C25, possibly raising questions with regards to their strategy, and/or risk assessment capacities. This will be investigated more closely in Illustration-06 further down.

Viewed across ten years, one would be forgiven to expect clear winners and losers. While there are differences between the upper and lower ranking funds, these are still so small that a single year of good or bad fortune may reshuffle most of, or even the entire ranking order. No pension fund is further apart from the median than 0.9%.

An altogether different conclusion emerges from this chart: The complete absence of adding-value (over and above benchmark, equal to a totally unselected universe of potential investments) gets to be the ‘winner’. Put differently: the considerable financial and organisational effort put into manager-selection and decision-making methodologies is obviously wasted. Ten years are too long a time frame, to brush off such a devastating conclusion. Whatever criteria may determine manager selection, investment skills are not part of the consideration.

This is the first of several illustrations that analyse the latest ten years in different ways. It shows cumulative gains (in green) relative to that of LPP-C25, the lower risk benchmark. Below, using the same ranking order as for gains, cumulative losses are shown, also as relative to those of LPP-C25.

Only few pension funds exceed the lower risk-tier benchmark’s return, yet most suffer losses far greater than it. Pension fund like to explain poor returns with their alleged risk aversion. The chart exposes this to be a false explanation.

The illustration helps to put deficiencies in risk-management under the spotlight. Numbers indicate the ratio of relative losses to relative gains: Neuchâtel (NE) 2.6, Appenzell IR (AI) 2.4, Publica 2.0, and Thurgau (TG) 2.0.

A sounder risk management seems to be in place at the pension funds of Graubünden (GR) 0.3, Luzern (LU) 0.4, Ticino (TI) 0.7, and Vaud (VD) 0.8 but often, such as in Graubünden, the concept is taken a step too far, surrendering much return for the sake of prudence (see 6-Year returns). That looks like a lack of confidence in one’s ability to assess the probabilities of risk and return.

This illustration positions cumulative gains and losses in a grid with losses shown horizontally, and the net balance of gains minus losses on the vertical axis. The purpose of the chart is to show the spread of risk (losses) between similar returns, and the spread of return with similar losses. The illustration shows the importance of achieving risk-efficiency through risk selection: Cheap risk manifests as gain, expensive risk generates losses.

Ideally, an investor would like to be in the left upper quadrant of such a grid, with high gains and low losses. The lower right quadrant is to be avoided, as it suggests poor gains and substantial risk.

This chart shows pension funds’ success ratios, defined as the proportional frequency of years during which they outperform. The resulting frequency is shown ‘net of coincidence’, after deducting 50%. A single pension fund, Zug (ZG) has a (mildly) positive success frequency, over and above ‘coin-flipping’. In other words: The vast majority of pension funds would be better off deciding on investment policy by tossing a coin. So much for the alleged benefit of manager-selection.

Few means of illustrating the results of pension fund management demonstrate so powerfully the industry-wide failure to provide value as this one. A more detailed but essentially identical analysis on pension fund aggregates can be seen here.

Performing regression analyses with fewer data points than 20 would be questionable, so this illustration can only include the 14 pensions funds where a sufficiently long history has been made available.

It lists r-squared between each pension fund and that benchmark index (selected from the list of six indices mentioned above) to which the pension fund is most congruent.

The higher the value for r-squared, the more passively a fund is ‘managed’, leaving little to no room for risk-management.

At the top of this page the two charts of Illustration-01 gave a first impression of pension fund performance, in aggregate form. Here, the annualised return of  individual pension funds is displayed. While reviewing the ranking order one should remain aware that a single year may have considerable impact on that ranking.

The ongoing, monthly performance of Swiss pension fund aggregates is available here.

In the final exhibit, pension funds’ investment efficiency is examined more closely. The analysis includes only those funds with 20 years of available data.

Cumulated gains and losses are both expressed in terms relative to those of LPP-C25, the lower risk-tier benchmark. The ratios so derived are positioned in a scatter diagram, where relative gains are shown vertically, and relative losses horizontally. A cross-hair indicates the value of one (equal to LPP-C25) and a diagonal indicates equilibrium between the two values, regardless of level. As additional reference, LPP-C40 is also included.

It is remarkable, how far away from the diagonal and to the right, toward much higher risk, the vast majority of funds are found, without being rewarded by higher relative returns. Only two pension funds are more risk-efficient than LPP-C25 but at the cost of meaningfully lower relative return.