SWITZERLAND - Pension funds have said the Swiss National Bank's recent decision to set a minimum exchange rate at CHF1.20 per euro was necessary, but might also increase the risk of inflation if no further measures are taken.

According to Claude Schafer, administration and communications manager at Caisse de Prévoyance de l'Etat de Fribourg, the measure to set up a minimum exchange rate between the local currency and the euro was necessary, both for pension funds and the country in general.

"This decision has enabled our pension fund's portfolio to bounce back by 15% after the announcement was made," he said.

However, Schafer - who said the pension fund's portfolio had lost as much as 20% of its value in August due to currency risk - conceded the measure would be viable only in the short term.

"Over the long term," he said, "the measure could lead to inflation risks, leading to further difficulties for pension plans."

Pension schemes with indexed pensions might see their costs rising as inflation increases, according to Schafer.

Similar problems might also arise for pension plans that have indexed their pension benefits on the last salary earned by their contributors.

An inflationary scenario would immediately lead to salary increases and, therefore, to a rise in pension benefits paid by pension plans.

The Swiss National Bank has said that, even at a rate of CHF1.20 per euro, the local currency is too high and should continue to weaken.

In an earlier interview, Patrice Vernier, director at Caisse de Prévoyance du Valais (CPVAL), told IPE his fund had been highly exposed to foreign exchange risk in recent months, as the Swiss franc strengthened considerably against the US dollar and the euro.

CPVAL's exposure to currency risk reached 16%, with 8% invested in the US dollar and another 8% invested in the euro.

Earlier this summer, some consultants in the country evaluated the losses made by Swiss pension funds on the equity market at around 15% at the end of July.

Daniel Thomann, head of pension fund consulting at Aon Hewitt, insisted that while Swiss pension plans have traditionally been less exposed to equity than some of their European counterparts, they have been significantly more exposed to currency risks.

Most of the investments in the equity market had to be made outside Switzerland, where the market is too concentrated for local investors.

The fact pension schemes failed to hedge their portfolios against currency risk has clearly amplified the risk effect.

However, in spite of the losses recorded before the introduction of a minimum exchange rate, most pension funds do not plan to implement such a strategy in the near future due to the costs involved, Thomann said.

For more on the impact of the SNB's recent decision on Swiss pension funds, see the October issue of IPE magazine.

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