We spoke with Daniel Gussmann, Chief Investment Officer of AXA Switzerland, about modern pension fund solutions, sustainable investments, and the challenges posed by the capital market.
AXA made the right move at the right time to put the occupational benefits business back on a solid footing and offer pension customers sustainably profitable solutions. Since the changeover three years ago, customers of AXA's semi-autonomous collective foundations have received more than CHF 1.8 billion in extra interest on their retirement assets than would previously have been possible with full-value insurance. That figure speaks for itself.
Semi-autonomous solutions have much more freedom in terms of investment strategy because they aren't bound by the same strict regulations as full-value insurance. This has opened up entirely new possibilities for us to seize long-term return opportunities for our customers. We completely restructured investments with a value of CHF 30 billion in the space of 12 months when the changeover took place. For instance, we were able to significantly increase the allocation to equities – the asset class with the best return prospects over the long term. This is good news for our customers because it means that their retirement assets are earning much more interest than the statutory minimum rate of 1% for occupational benefits that normally applies with full-value insurance.
Capital markets, especially equity markets, are regularly subject to fluctuations. We have a risk-conscious investment strategy with a high degree of diversification, and this has a stabilizing effect on performance and the coverage ratio. Even at the height of the coronavirus crisis, when stock markets were plummeting, the coverage ratio always stayed comfortably above 100%. The numbers have to add up over the long term, and both our portfolios and the collective foundations themselves are very well placed to absorb future fluctuations.
“We got into interesting asset classes like Swiss real estate and mortgages at an early stage and built up considerable expertise in alternative investments such as private equity. That's now paying off.”
We manage pension assets for more than 40,000 companies in Switzerland. Many of these are affiliated to a collective foundation for occupational benefits. Each foundation's board of trustees decides on its own investment strategy, which we then implement in compliance with the applicable legal restrictions.
We've always taken care to invest our customers' premiums and pension contributions securely and profitably, and it pays off.
Thanks to effective diversification, our portfolios are in great shape for the future. Our extensive experience with mortgages and direct real estate investments contributes to our portfolios' stability, while our long track record in alternative asset classes like private equity helps us to pinpoint attractive, sustainable return opportunities for the foundations and their customers. On top of this, we rigorously employ a contemporary best-in-class approach.
We systematically seek out the best investment style and the best asset managers for each asset class. This independent best-in-class approach allows us to find the best possible investment opportunities with the greatest potential to deliver returns for our customers. We take exactly the same approach with our own pension fund. We invest our customers' assets in accordance with the same principles used for our own staff's retirement assets.
AXA has defined clear climate goals for the assets it manages, including pulling out of the coal industry completely by 2030 in the OECD and EU countries and by 2040 worldwide. As an insurer, we're directly affected by climate events and other global risks, and that's why we've been working hard to address these issues for many years. We factor environmental, social, and governance (ESG) criteria into all of our investment decisions and invest strategically in companies that operate sustainably. Any business that isn't sustainable just isn't tenable for us.
“We invest our customers' assets in accordance with the same principles used for our own staff pension fund.”
It's been performing very well indeed. We've achieved strong growth in assets under management for third-party customers over the past three years, and the figure now stands at CHF 38.8 billion. Most of these customers are collective foundations and pension funds. Achieving satisfactory returns has become more and more challenging for them in recent years. Our many years of experience and our size allow us to provide them with excellent support in this problematic capital market environment.
Bonds are the biggest asset class for Swiss pension funds, normally accounting for roughly a third of their invested assets, and low interest rates have made it impossible to generate sufficient returns from them over the long term. Meanwhile, both the statutory conversion rate stipulated in the Occupational Pensions Act and the current retirement age mean that a much higher target return is needed to fulfill pension obligations and pay an adequate rate of interest on workers' retirement assets.
Besides a full range of asset management services that involve developing and implementing entire investment strategies, we also offer bespoke investment solutions such as mortgage investment foundations. These allow pension institutions to diversify their portfolios and generate attractive excess returns relative to bonds.
Daniel Gussmann joined AXA in 2009 and is currently Chief Investment Officer (CIO) of AXA Switzerland and Head of Asset Management. He became a member of the Swiss Investment Management team in June 2012 and took over as Head of Allocation & Strategy in August 2014. He spent three years at AXA Germany in asset management and corporate strategy roles. Daniel has an MBA from the University of Mannheim and is a Chartered Financial Analyst (CFA).