Swiss funds avoid regulatory caps via infrastructure debt

Swiss pension funds are diverting capital towards direct debt investments in infrastructure to avoid new regulatory restrictions.

Patrimonia has signed a sale-and-leaseback deal with a company for its industrial infrastructure and Retraites Populaires is financing the construction of hospital accommodation. Both deals have been devised to circumvent new caps on alternative investments.

In July, amendments to regulations on Swiss pension fund investment (BVV2) made infrastructure investments part of the “alternative investment segment”, which is capped at 15%. Proposals to cap additional management fees could impose even greater restrictions on infrastructure investments in the future.

Yves Cuendet, chairman of the CHF400m (€326m) Patrimonia pension fund, said the sale-and-leaseback provided “a way of coming to terms” with the new regulations, and said such deals were “favoured by the local authorities to help avoid real estate speculation by investment funds”.

Speaking at the Swiss Pension Conference in Geneva, organised by the CFA Society Switzerland, Cuendet described the deal as “infrastructure industrielle privée” and a “win on all sides”. He said: “The company wants to lighten its balance sheet, the pension fund wants long-term return, and the public authority wants to avoid real estate speculation and secure industrial activities.”

Also speaking at the event, Serge Ledermann, deputy CEO and CIO at Retraites Populaires, said: “This 15% limit is very low especially if additionally management fees are capped in the future as currently discussed in Bern, then we cannot do anything in that field.”

Retraites Populaires, the public-law institution managing public pension assets in the canton of Vaud for several plans with CHF22bn under management, is financing a hospital accommodation in Lausanne.

“The canton is providing the land, the pension fund builds it, an operator will run it and the pension fund will be paid rent,” Ledermann said. “Pension funds could be ideal players in these fields”.

He added: “Over the last years there was a shift towards private investment in real estate – because in order to reach the targeted return we have to get off the beaten track.”

Ledermann said classic public-private partnership (PPP) infrastructure deals were difficult in the canton of Vaud because of the very sound financial situation. “The Canton is able to finance all infrastructure projects itself”, he said.

“But if you widen the focus to outside this canton there are multiple cases where infrastructure is getting old, and renovation costs are increasing. We – as other pension funds – can offer to share this investment if the returns are satisfactory,” he said.

Return targets are above equivalent fixed income returns. “Quite boring”, Ledermann said, but “at 4-6%, boring is actually okay”.

Patrimonia is targeting similar returns. But Cuendet said that not all investments described as infrastructure are feasible for the fund. “Energy investments are depending on the subsidy policy regarding renewable energy which cannot be forecast and can change over time,” he said, by way of example. “This is not within our comfort zone.”

  The Swiss government is in discussion to establish a so-called Zukunftsfonds, a vehicle in which venture capital for infrastructure would be sourced from domestic institutional investors. Ledermann and Cuendet rejected any attempts to force pension funds to participate.

“People think this type of product has to be regulated but this is just putting constraints on pension funds,” Ledermann said. He had “no idea” how the government expected to raise its target of CHF7bn, because this would represent 1% of total of pension fund assets – and “most pension funds will be opposed”.