Swiss pension funds are facing an increasingly uncertain economic environment, with inflationary pressures, geopolitical risks, and the end of an era of low interest rates creating challenges. In this context, gold emerges as a strategic asset that offers diversification, risk management, and potential for long-term growth.
Find below our breakdown of the World Gold Council’s second report more comparing gold to bonds in the euro zone with an eye on Swiss pension funds, amidst their recent struggles
1. Swiss Pension Funds' Recent Performance
In the past few years, Swiss pension funds have had to navigate a volatile financial landscape.
Contrary to expectations that market conditions might stabilize post-pandemic, geopolitical tensions, rising energy prices, and inflation have created a challenging environment.
Graphic: Europe says the quiet part out loud. Bonds contribute to risk, they do not mitigate it.
From Swiss Pensions Now Want the Gold:
There is a problem in Europe stemming from a dogmatic belief that bonds always reduce risk. The last 2 years proves otherwise. Smart banks like UBS have been telling clients to be careful. Now, the WGC lays the whole “bond as Safe Haven“ fallacy bare what amounts to a statistical mandate for pensions to buy gold and sell bonds.
Notably, 2022 saw a significant drop in pension fund asset values due to simultaneous declines in both bond and equity valuations. The average coverage ratio fell from 115.3% to 104%. Although there has been some recovery, with the coverage ratio estimated at 112% by mid-2024, the ongoing global economic uncertainties make it essential for pension funds to maintain these gains
2. The Strategic Role of Gold
Gold has historically served as a hedge against systemic risks and a reliable store of value. During periods of extreme market stress, gold's negative correlation with equities and other risk assets increases, providing downside protection.
Graphic: Gold has outperformed most broad-based portfolio components over the past two decades and provides downside protection.
In the Swiss context, gold has generated positive returns in eight of the ten worst years for the Swiss equity index. This resilience makes gold a valuable addition to pension portfolios, enhancing risk-adjusted returns and providing liquidity during market downturns
3. Reducing Reserve Requirements with Gold
Allocating a portion of a pension fund’s portfolio to gold can help reduce the reserve requirements mandated by Swiss regulations.
For a typical Swiss pension fund, which might allocate around 1% to 5% of its assets to gold, the reserve requirement could be reduced from 14.8% to 13.8%. This reduction is achieved without sacrificing expected returns, thereby improving the return on reserve requirement ratio.
By diversifying into gold, pension funds can maintain a higher coverage ratio, ensuring their ability to meet future pension obligations even in turbulent time.
Table 2: Reserve requirement and risk properties
| No gold | With gold | |
| Reserve requirement (97.5% confidence level) | 14.8% | 13.8% |
| Expected return | 3.3% | 3.3% |
| Expected volatility | 6.7% | 6.4% |
| Exepected shortfall | 14.4% | 13.6% |
| Value at Risk (VaR) | 11.4% | 10.6% |
*Data as of 31 December 2023.
Source: Complementa, World Gold Council
4. Impact on Portfolio Risk
Gold’s addition to a pension portfolio has a favorable impact on key risk metrics such as volatility, Value at Risk (VaR), and expected shortfall.
Chart 7: Monthly VaR (95% confidence) – 100k portfolio without gold
Using Complementa’s proprietary risk model, the analysis shows that while the expected total return remains the same, the portfolio’s risk is reduced. This improvement in risk metrics underscores the effectiveness of gold as a diversification tool in Swiss pension funds
The Swiss Conclusion
Given the macroeconomic challenges and the need for robust risk management, Swiss pension funds would benefit from a strategic allocation to gold. Gold not only offers protection against systemic risks but also contributes to long-term growth and diversification, ensuring that pension funds can meet their obligations to members. As demonstrated, a well-considered allocation to gold can reduce reserve requirements, enhance portfolio stability, and improve overall fund performance.