Swiss pensions look to ILS as alternative asset, but regulation hinders

Switzerland-based Pensionskassen, or pension funds, are increasingly looking to alternative and risk-based investment strategies and as a result the insurance-linked securities (ILS) asset class is gaining popularity, according to reports.

A recent article by Investment & Pensions Europe (I&PE) explores changes in the risk allocation strategies of the Swiss pension sector, stating that firms are increasingly looking to alternative risk-based strategies to bolster their portfolios with diversified sources of return from risk-based assets, and achieve higher yields.

However, Swiss regulation means that a maximum of 15% can legally be allocated to alternatives, leaving some concerned that smaller pension funds might not want to risk exceeding this regulatory limit and placing liability on the board. Regulatory pressure could slow adoption of risk-based assets and alternatives, making any move to embrace them slower, the article warns.

Head of institutional investors at Notenstein Private Bank, and one of the experts preparing for a “new era” for the Swiss pension sector, Aris Prepoudis said; “They are caught between a rock and a hard place, because they would like to go more into alternatives, but they are concerned that they will break through the regulatory limit.”

Prepoudis goes on to explain that perhaps the more developed, larger pension schemes will consider taking the risk, but stresses that all “pension schemes are going through a challenging process of deciding how they are going to deal with the new classification of alternative investments.”

The Swiss second pillar, or the occupational pension scheme, totals €552 billion and is divided up into a large amount of smaller pension funds and a significantly lower level of large schemes. So while 15% doesn’t seem like much, if even 1% of the industry’s €552 billion was to enter the alternatives market, including ILS, reinsurance linked investments and catastrophe bonds, this is still a significant amount and would be hugely beneficial to the space, almost able to double the current size of ILS and alternative capital.

As reported previously by Artemis pensions funds have been looking at the alternative market for some time, and despite the Swiss markets regulatory limits there are clear opportunities within the sector that can benefit both parties. The ILS asset class can add specific qualities (of diversification and low-correlation) to pension funds portfolios and in return provide ILS market players with opportunities to deploy capital in new, diversified reinsurance-linked strategies.

Swiss fund experts, including Reto Hintermann, head of institutional mandates for Switzerland at Swiss & Global Asset Management and Harald Reczek, head of the global client group, Switzerland, Austria & CEE, at Deutsche Asset & Wealth Management, feel that while there is some demand for hedge funds and real estate investments from Swiss pension funds, ILS is an asset class that is gaining popularity because they are “strongly uncorrelated with public markets.”

As the I&PE article mentions the expansion of Swiss pension funds into the alternatives market could be a slow process, as firms continue to consider the benefits and risks associated with it, while being mindful of the regulatory limitations.

But it seems clear, as we mentioned in a previous article, that pension funds are increasingly looking to ILS and reinsurance as their appetite for investment risk premia, diversification and ultimately returns continues.