Switzerland Urged to Reform Pensions | Chief Investment Officer

(March 26, 2012) — The International Monetary Fund (IMF) has urged Switzerland to reform its pensions system to ensure its ageing population is adequately catered for in the near-future.

The tiny European nation must tackle its ageing population – an issue that other countries across the continent have been forced to address – and align its systems to cope with a larger number of retired people in the short term, the IMF reported in its latest study on Switzerland.

The report said: “Measures to tackle the financial consequences of population aging should gain center stage and include additional ‘fiscal rules’.”

The IMF said that if policies were not changed, ‘the increase in aging-related expenditure will already start to bite in earnest around the end of this decade. Consequently, time for reform preparation and implementation is running out quickly’.

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The report comes after many European nations in a less fiscally stable position than Switzerland have been forced to address rising pensions costs.

Even before Italy was caught up in the whirl of the sovereign debt crisis last summer, it had already begun to implement changes to make its pension system more affordable and sustainable. France has experienced wide-scale strikes over attempted increases to raise the retirement age in recent years and the United Kingdom’s Chancellor last week announced that the government would look at linking a raise in its retirement age with improving longevity.

The IMF’s report on Switzerland said this last point was the most important for the country to consider and it should look at nations where this had already successfully taken place.

“Such a rule would reduce the need for repeated and often difficult reform discussions,” the report said.

Equalisation of the male and female retirement age and pension indexation to inflation only (rather than both inflation and wages) could be considered, the IMF stated.

Switzerland has been mostly isolated from the most recent financial crisis and its currency has seen massive appreciation against the euro and dollar as a result. The Government has taken measures to ensure the Swiss franc does not move totally out of kilter with other base currencies. The IMF said this was appropriate, but not endlessly sustainable.

It said: “Once economic conditions normalize, a return to a freely floating currency would be desirable. While the exchange rate floor has been successful, once an economic recovery gets under way and deflation risks recede the SNB should move back to a free float.”

Last month, aiCIO revealed that Ireland had asked the Organisation for Economic Co-operation and Development (OECD) to review its pensions system. The government said it wanted to take a fresh view of the country’s pension sector in light of changing economic and demographic circumstances.

Since no standard exists for benchmarking the performance of unlisted infrastructure investments, institutional investors must choose a benchmark with “tolerable imperfections.”

(March 23, 2012) — As pension funds become increasingly interested in infrastructure as a long-term investment, a new paper asks: How should we benchmark and value unlisted asset classes?

“Benchmarks for Unlisted Infrastructure” asserts that institutional investors must choose a benchmark with “tolerable imperfections.” The paper was written by Jagdeep Singh Bachher, deputy CIO at the Alberta Investment Management Corporation (AIMCo) who recently received an aiCIO Industry Innovation Award, Ryan J. Orr, executive director at Stanford University’s Collaboratory for Research on Global Projects, and Daniel Settel, co-founder and vice president of operations at Zanbato Group — says that institutional investors must choose a benchmark with “tolerable imperfections.”

“Different benchmark selection choices have different inherent strengths and weaknesses. The Bailey criteria provide a generally accepted framework for assessing benchmark quality. When we apply the six Bailey criteria to assess the quality of the available families of infrastructure benchmarks, we find that all of the benchmark options are flawed—that is, none satisfy all six criteria,” the report, originally published by the CFA Institute, asserts.

Bailey’s criteria include 1) unambiguous, 2) investable, 3) measurable, 4) appropriate, 5) Reflective of current investment options, 6) Specified in advance.

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The authors outline a number of potential benchmarks used for institutional investors. While the hybrid benchmarks may combine both equity and debt components in a composite index, the custom portfolio benchmark satisfies the largest number of the Bailey criteria, but still suffers from being composed of listed companies. Meanwhile, the peer group benchmark is the only benchmark that is fully appropriate and reflective of current investment options, the paper notes, but it fails on most of the other scores.

The paper continues to note that within certain limits, chief investment officers will allocate assets to infrastructure if expected returns exceed the opportunity cost of not investing in a portfolio of public debt and equity. “As one CIO describes, ‘In the absence of attractive opportunities for active management, our partners would simply buy and hold broad-based equity and bond indices.'”

In other words, according to the authors, investing in illiquid infrastructure assets with a buy-and- hold strategy over long time horizons is a lot like managing a multicrop farm. “Once capital has been committed, it is difficult to redeploy. Returns cannot be known precisely until after the harvest, when the actual performance is tallied.”

Therefore, the authors outline describe several general principles for selecting and implementing benchmarks for unlisted assets.

1) Separate the “opportunity cost” and “manager value-add problems” problems, 2) Take the long view, 3) Create the right incentives, 4) Match benchmark and vintage period, 5) Match benchmark and valuation frequency, 6) Contemplate cost–benefit trade-offs, 7) Track the business plan, 8) Revalue conservatively.

The paper is the second part of an earlier report by the same authors that note that different investors have different goals for their infrastructure portfolios, leaving no single “right” way to benchmark the asset class. To conduct the analysis, AIMCo conducted a three-week brainstorming, critiquing, and idea refining session, with the paper’s analysis coming from interviews with nine institutions that maintain dedicated infrastructure investment allocations, as well as a review of scholarly literature.

According to the paper, the diversity of benchmark approaches reflects a number of factors — namely the newness and heterogeneity of infrastructure, variations in risk–return expectations across institutions, and a lack of widely cited performance data for infrastructure. “Several institutions noted a desire for greater benchmark stability when selecting real return benchmarks,” the paper asserts. “Some hybrid approaches may represent an attempt to integrate more of the desired features of infrastructure investing (low volatility, inflation-linkage, cash yield, etc.) into a single composite. The diversity also reflects the fact that infrastructure investments play different roles in different investors’ portfolios.”

Furthermore, the paper maintains that despite the different allocations, institutional investors generally conclude that on the risk–return continuum, infrastructure investments fit somewhere between regular equities and fixed income.