Top performance has its price

The steadily increasing number of pensioners compared to the working population is putting pressure on the Swiss pension system. According to calculations by the federal government, this development is likely to put the pension system back into distress in just a few years, despite the decision to raise the retirement age for women - provided that no countermeasures are taken. In the ongoing debate about possible adjustments to pension schemes, the costs of asset management for pension funds are also regularly in the spotlight.

This fragmented approach occasionally leads to the view that a significant proportion of pension assets seep away into the system of asset managers. Critics argue that insured persons would benefit more if the parties involved were to exercise greater cost discipline or if occupational pension provision were to be restructured from the ground up.

However, this opinion is based on incomplete grounds, as it only scrutinises the cost side and thus ignores the total return achieved on the financial markets. An area that is commonly referred to as the "third contributor", as this - together with the contributions of employers and employees - forms an important source of income for occupational pensions. According to a recent study by AMAS, the industry organisation of the Swiss asset management industry, around 28% of the average pension fund assets of CHF 113,000 per capita in Switzerland - calculated over the past five years - come from the third contributor.

Additional costs pay off

In the current focus on the Pension Fund Study 2023, we therefore present the overall picture. With this overview, both those insured in the pension funds as well as employers and politicians can form a comprehensive opinion on the topic.

The most important findings are summarised below:

Figure 1: Top performance costs

(Average asset management costs in % of cost-transparent investments)

A look at the asset management costs of those pension funds that have achieved the best net return over the past five years and those institutions at the bottom of the ranking list shows that the lead was not free for the top funds. Their expenses over five years are on average 26 basis points higher than those of the comparison group.

The top and bottom performers are the ten per cent of pension funds that have achieved the highest or lowest returns per year over the past five years.

More returns, in good times and bad

The difference becomes even more striking when comparing the net returns, i.e. the returns after deduction of asset management costs, of the top performers with those of the weaker performers.

Figure 2: Significant differences in returns

(Average net return in % after deduction of costs)

Since 2018, the best-performing pension funds have generated an impressive average net return of 3.7 per cent per year. In contrast, the funds at the other end of the scale had to be satisfied with a meagre average annual net return of 0.2 per cent. The lower costs have therefore not brought any advantage here. Rather, it can be stated that the higher expenses are justified when the net return achieved is taken into account.

Different costly investments

But where do the additional asset management costs actually arise? The investment strategy defined by the Board of Trustees of the pension fund has a significant influence on the return on pension fund investments - and therefore also on their costs. This is because management expenses and fees vary depending on the investment category and class.

Figure 3: More expensive investments for top pension funds

(Asset allocation in %)

Conclusion

The unbalanced focus on the cost side in the asset management of pension funds may make headlines, but it is not very expedient in terms of the matter at hand. After all, it is not the costs that are decisive for policyholders, but the highest possible net return, i.e. the return after deducting all expenses. Ultimately, it is the net return, as the "third contributor", that is responsible for a significant proportion of people's pension assets.

The comparison of the best and weakest funds in the period under review shows that the broadest possible diversification across all investment classes has paid off. This also includes investment classes with higher management fees, whose costs in turn depend on the nature of their activities. If the pension funds were to focus solely on the cheapest possible investment classes and forego investments in real estate or alternative investments, they would have missed out on a substantial part of the return for their policyholders. This comparison of the pension funds with the best net returns (after deduction of costs) over a five-year period compared to the tail-end funds shows that the higher costs have definitely paid off over the reporting period.

Graphics: Swiss pension fund study, Swisscanto

Legal information: Zürcher Kantonalbank has based the preparation of this publication on the investment requirements and specifications of Swiss pension funds; it is intended solely for information and advertising purposes and is expressly not aimed at persons of foreign incorporation/nationality or domiciled/resident abroad.

This publication has been prepared by Zürcher Kantonalbank with the care customary in the business. However, Zürcher Kantonal­bank offers no guarantee for the accuracy and completeness of the information and opinions contained therein (in particular forecasts) and accepts no liability for damages resulting from the use of this publication. Past performance and returns are not a reliable indicator of future results. This publication contains general information and does not take into account the personal investment objectives, financial situation or particular needs of any specific recipient. Recipients are advised to check the information for legal, regulatory, tax and other implications, if necessary with the assistance of an advisor, to ensure that it is compatible with their personal circumstances. © 11.2023 Zürcher Kantonalbank. All rights reserved.