In this section, authors share their views on economic and financial topics.
Switzerland’s pension landscape is operating in a challenging environment: Most pension funds need to generate a net return – or required return – of between 1.5 and 2.5 percent per year in order to sustainably finance their promised obligations. At the same time, 10-year Swiss government bonds offer a gross yield of only around 0.4 percent, while the overall domestic-currency bond market, as measured by the Swiss Bond Index, yields no more than 0.9 percent. So why do pension funds continue to hold significant allocations to fixed-income investments in their portfolios?
A Paradigm Shift Since the 1990s
Conditions in the early 1990s were entirely different: The required return of pension funds was significantly below prevailing interest rates. Pension funds could meet their obligations without taking on risk simply by investing in high-quality bonds. The interest-rate environment also allowed them to grant additional interest credits to active members without assuming investment risk.
For insured members, however, these were difficult times. High inflation led to a substantial loss of purchasing power for both pensions and accumulated retirement savings. In other words, despite high interest rates, the purchasing power of many retirees and active members declined in the early 1990s.
