Investor Profile

Defined benefit thrives at Migros

Success stories at pension funds are a real rarity in crisis-ravaged Europe, with deficits hampering countless major international firms.

The CHF16.9-billion ($18.1-billion) pension fund of Swiss supermarket cooperative, Migros, is firmly in the blessed minority of funds enjoying rude health. Migros Pensionskasse was even able to boost its surplus to $1.3 billion in 2011 while markets dropped.

The fund appears at first to have ridden on the back of the alternative investment boom in recent years.

Some 33 per cent of the fund is invested in bonds and as much as 29.8 per cent is allocated to real estate. These two asset classes were solid performers throughout the crisis, the latter offering Migros a stunning 13.1 per cent cumulative return in 2010 and 2011.

Christoph Ryter, head of the fund, says that domestic real estate in particular has been a major help to the fund.

Striking Swiss gold

Ryter baulks at the suggestion that the fund has followed an alternative path to riches.

“It might sound strange to anyone in the UK, for instance,” he says, “but real estate is a classic, established asset class in Switzerland”.

The latest indications from UBS are that Swiss property prices have risen 35 per cent in the past five years. The market has been helped by an influx of European Union wealth that sees the fiercely independent alpine country as a safe haven.

Is it time then to go even deeper into real estate to make it the Migros fund’s largest asset class?

Definitely not, says Ryter. “We don’t believe very much in our capability to foresee the best performing asset classes in the future, so we stick to a strict rebalancing,” he adds.

The fund is selling a small portion of its real estate holdings to make sure it doesn’t exceed the 30 per cent it earmarks for the asset class in its long-term strategy.

This strategy is also forcing the fund to go cool on its other recent good performer, bonds, which should not exceed a 40-per-cent limit. Ryter feels anyway that the bonds outlook is modest as “it is difficult to imagine that interest rates will get any lower in the future”.

Equities have been the biggest winner of efforts to get the portfolio to match its targeted long-term asset mix, with shares targeted at 30 per cent of the total. The Migros fund expanded its equity holdings in 2011 to compensate for a drop in their value since the crisis.

That came despite the equity portfolio seeing a 10.6 per cent fall in value over the year, hampered largely by an underweighting of US equities against the more troubled European and Japanese markets.

Clearly the Migros pension fund is not run on reactions to recent fortunes in asset classes. “We hope to get an anti-cyclical momentum into the portfolio,” Ryter explains.

Satellite portfolio

In addition to rebalancing its asset mix, that anti-cyclicality has been gained by a 15-per-cent commitment to satellite portfolios in each of the fund’s three main asset pools.

These consist of assets such as high-yield corporate and inflation-linked sovereign bonds, private equity, absolute-return funds and opportunistic property investments.

Naturally, not all investment calls have paid off. Currency hedges were taken out in 2010 and 2011, when a flight to the safety of the Swiss franc sent its value soaring and threatened the returns on Swiss pension funds’ overseas investments.

Ryter chuckles as he recalls that just as the Migros fund had reached the targeted hedging ratios on its equity portfolio, the Swiss National Bank introduced its famous CHF1.2-to-euro ceiling.

That move sent the value of the Swiss currency tumbling “and we missed out on a free hedge,” says Ryter.

The fund has since unwound its euro-currency hedge on equities due to the confidence it has in the Swiss National Bank’s stance keeping the franc low. It wants to leave nothing to chance though, keeping 90 per cent of its bond-currency risk hedged and significantly less than that hedged on its equity portfolio.

Staying on message

The investment approach at the Migros pension fund might look rather advanced compared to the UK and US pension funds that have seen huge equity bets lead them on to the rocks in the past decade.

That the Migros fund achieved a meager 0.1-per-cent return in 2011, well below its own benchmark, suggests it is far from immune to the international struggle for investment returns, however.

How can Migros continue to operate a healthy defined-benefit pension fund then when the schemes are becoming endangered not just in the UK and US but also in Switzerland?

A big part of the answer lies in Migros’ status as an unlisted cooperative. “There is not the same pressure to de-leverage and de-risk by getting rid of a defined-benefit scheme that exists at other big Swiss companies,” Ryter explains.

Ryter admits though that increased life expectancy is a major threat to the fund’s defined-benefit model.

He also speculates that should inflation take off in the future, the Migros fund might also need to make the switch to defined contribution.

Recent changes to the fund’s benefit promises have also helped maintain the status quo though by “making the investment demands more comfortable”, he says.

The fund now offers 70.2 per cent of a member’s final salary after 39 years of contributions, a cut from 74.1 per cent. Migros employees must now work until 64 to claim their full company pension too, giving them a year longer than previously to make retirement plans.

“It’s not a very sexy message,” says Ryter. It seems to work rather well though.


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