Moving from traditional assets to alternatives - Trying to stabilize Swiss conversion rates

If you keep rates low enough, investors will respond. Unfortunately, the response may not be what is expected. One of the macro objectives with forcing rates negative is to get investors to become bigger consumers; however, you can also get investors to be bigger risk takers or at the minimum different risk takers from expectations. For pensions, there is not saving versus consumption choice. In a lower rate world, pension have three options: collect more funds for future liabilities, cut pay-outs, or find new investments to offset the lower returns from traditional assets. 

According to the consulting firm Complementa, Swiss pension funds have increased alternative allocations beyond 10% with a range of new investment choices. These alternatives are for pensions that are often fully funded; however, the conversion rates that set the annual amount paid have been falling. If alternatives can boost or stabilize yields, then the conversion rate can stabilize, which will be good for pensioners. 

The finance behind alternatives is actually simple. Add alternatives and a pension can expand the efficient frontier. New return and risk opportunities become available. Some may increase risk while others will decrease risk or increase return. The role of the pension manager is to find the alternatives that fit within the return to risk objectives; low correlation and stronger stand alone returns.