The continuing negative reports from the major bank Credit Suisse and the crash in the share price are also leaving their mark on the Swiss pension world. Consultants and those responsible for pension funds take a closer look.
The sharp fall in the Credit Suisse share price is causing uncertainty.
The Credit Suisse crisis is also making those responsible at Swiss pension funds nervous. The situation at the big bank is definitely an issue for the pension funds, says Ueli Mettler, partner at the pension fund consultancy c-alm. “There is uncertainty.”
This is due not least to the sharp fall in the financial institution’s share price. This increased on Friday by 9.3 percent to CHF 2.95. Since the beginning of the year, however, it has fallen by almost 65 percent. The reasons for the price losses include outflows of customer funds and questions about the strategy of the big bank.
In terms of risk management, pension funds must regularly deal with the so-called counterparty risks – i.e. the risks that a party would suffer in the event of the insolvency of a business partner, says Hanspeter Konrad, director of the pension fund association Asip. It is about so-called risk reduction obligations. “Against this background, the pension funds also assess the development of Credit Suisse, among other things, and make their investment decisions based on their assessment of the situation.”
Important player in pensions
The pension funds naturally have many connections to the ailing Swiss bank. Many pension schemes have cash holdings with the financial institution or have invested in CS investment products.
Credit Suisse also acts as a global custodian in the Swiss pension fund market. In this role, the Bank acts as custodian of pension fund deposits. The fact that it is a major player here is shown not least by the fact that it publishes a quarterly pension fund index that is highly regarded in the industry. As a leading provider in the global custody business, CS is able to carry out broad-based and therefore representative evaluations of Swiss pension funds, the bank writes in a presentation of the index. The data for the barometer came exclusively from the segment of autonomous pension funds.
Possible counterparty risks
A Credit Suisse spokesman did not comment on whether Swiss pension funds had recently withdrawn funds from the bank. He referred to a media release from November 23. It said net outflows at Credit Suisse’s Swiss Bank were at the end of the third quarter of this year approximately 1 percent of fixed assets.
Due to their fiduciary duties, foundation boards of Swiss pension funds are obliged to clarify counterparty risks. In view of the ongoing crisis at Credit Suisse, no foundation board member wants to be accused later of having overslept. The investment consultants working for the pension funds are also aware of the problem.
“An investor’s analysis of the extent to which he is actually exposed to the counterparty in question begins when dealing with the subject,” says Mettler. Investments that would be affected by the risk of bankruptcy of the counterparty included bank deposits, bonds and currency forwards – the latter are primarily used to hedge currency risk at pension funds. Structured products also have a counterparty risk. According to observers, however, these only play a marginal role in pension fund portfolios.
In addition, there is a risk of temporary access restrictions to securities holdings when bankruptcy proceedings are started, says Mettler. “Although all securities held by the custodian bank are fundamentally special or customer assets and are not economically part of the bankruptcy estate.” However, until the bankruptcy administrator has defined the various assets, the investor cannot access these securities holdings. This could potentially take longer.
“Don’t overreact”
The pension funds should “not overreact,” says Martin Janssen, founder of the pension fund consulting and software company Ecofin and emeritus finance professor. It is certainly conceivable that in the worst case – bankruptcy of CS – such delays could occur. The financial market supervisory authority (Finma) meanwhile has the clear opinion that this case will not occur. In addition, the credit market in Switzerland works without restrictions. “A pension fund could always get a temporary loan from another bank if something like that happened, which I don’t think,” he says.
Pension funds should of course check who exactly their counterparty is: this is generally CS (Switzerland) AG, which has an “A–” rating from Standard & Poor’s credit watchdogs, and not the parent company CS Group AG with its rating of «BBB-». Every customer should not just keep their liquid assets, which are on the bank’s balance sheet, at a single institute, says Janssen.
However, in connection with switching pension funds away from CS, he points out that there are also costs that the insured ultimately have to shell out. When switching global custodians or when switching investment products, the switching costs are likely to be recurringly higher or be more than 20 basis points (0.2 percentage points) on a one-off basis, says Janssen. A change of global custodian is also considered to be a time-consuming exercise, according to the industry.
In the business of managing pension funds, 20 basis points is a lot and could correspond to the cost of several years of wealth management, says Janssen. “You have to think about whether you should shoulder these costs in the face of unreal problems,” says Janssen. Insured persons could ask the board of trustees “serious questions if it messes up 20 basis points”.