Annual report summary 2016

Swiss Federal Funds for the Old Age and Survivors’ Insurance (AHV),
Disability Insurance (IV) and Income Compensation Insurance (EO)
 Report of the Chairman of the Board of Directors

Manuel Leuthold, Chairman
well, demonstrating the robustness of our risk management sys-
tem and the suitability of the financial instruments used.
In 2016 the Social Security Funds
achieved the performance of
3.75% for the AHV Fund, 2.63%
for the IV Fund and 3.85% for
the EO Fund. These results were
achieved by compenswiss while
respecting the risk level defined
for each of the social benefit
schemes in accordance with its
profile, i.e its current financial
situation and its corresponding
outlook. In addition, compen-
swiss anticipated and handled
the consequences of Brexit
Finally, the volatility of the equity market requires us to hedge
against extreme fluctuations in our portfolio, which likewise entails
considerable costs.
Consequences of a demographic change
The shifts in the demographic structure of Switzerland’s popula-
tion and changes in our society influence what is happening in our
social benefit schemes. The Federal Social Insurance Office pub-
lishes annually an outlook for the three Funds.
BSV Perspectives: operating result
in CHF million
2 000
1000
0

The Board of Directors is extremely satisfied by the net result of – 1 000

CHF 1 209 million that compenswiss achieved for our country’s social – 2 000

benefit schemes through its professional financial management.
– 3 000

Difficult capital investment on international markets

– 4 000
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
The duty that compenswiss has to fulfil for the Social Security Funds
is complex and calls for a difficult problem to be solved. We have a AHV IV EO
large volume of assets – CHF 34.8 billion – to invest. However, the Source: BSV Perspectives June 2016 with additional IV financing (until 2017)
financial market of our country, Switzerland, is too small for an effi- EO contribution rate: 0.5% since 2011, 0.45% since 2016

cient investment of all our assets. We are therefore obliged to invest

a considerable proportion of the assets abroad, in currencies other While the EO Fund perspectives are stable, the IV Fund shows a
than the Swiss franc, the hard currency par excellence. That in turn positive trend in its finances in spite of its debt load of CHF 11.4
requires hedging a large part of our foreign currency investments, billion. The projections for the AHV Fund oblige us to be very cir-
which in the current market environment is very expensive. cumspect in investing its assets. Although AHV funding should be
stabilised by the “Pensions 2020” reform project, until there are
In general, low interest rates in the most important markets reduce
binding parliamentary and referendum decisions in this regard we
considerably our earnings expectations. In July 2016, almost a
have to work with a shorter time horizon when managing the AHV
third of the government bonds issued by the industrialised coun-
Fund. This implies holding the cash needed at all times to meet
tries presented a negative yield. However, for reasons of risk this
our obligations and abstaining from new investments in less liquid
asset class makes up the largest part of our portfolio (65% bonds
vehicles, despite their better prospects for returns.
and loans). With negative interest rates increasingly common at
our partner banks, our cash holdings, of which we have to main-
tain a large amount to cover our annual payouts of CHF 53.4 billion,
impact heavily on our performance.

1
Board of Directors
Left to right
Back row: H. Schneider, B. Montant, B. Rigassi, T. Daum, D. Lampart, U. Eggenberger, A. Wüthrich, W. Gredig.
Front row: M. Wenk, S. Gisin, M. Leuthold, M. Troyanov, G. Lenherr.

Growing interest in the social benefit schemes But we are called upon primarily to convey our challenges and
– enhanced communication at compenswiss requirements, our gover­nance and the results of our activities to
the public and their representatives in such a way that they can be
The further deterioration in the operating result for the AHV and the
understood without specialist knowledge.
negative return for the Social Security Funds in 2015 as well as dis-
cussion about the “Pensions 2020” reform project and the popular
Increase of administrative tasks
initiative “AHVplus” brought a great deal of attention during the
reporting year to Social Security Funds and the management of compenswiss cannot escape the trend towards more regulation
their assets by compenswiss. A number of motions in parliament and an expansion in administrative work. New requirements and
and enquiries from the media and professional bodies gave us stipulations regularly add to the workload of our staff and result in
the opportunity to explain our legal duties and how we fulfil them additional costs. The numerous obligations to inform and explain,
using the tools of professional asset management. the provision of data as part of Swiss or international trans-
parency programmes and voluntary compliance outside asset
It clearly appeared that a wider public, even though not always
management with the Federal Act on Public Procurement con-
with financial literacy, is interested in the management of the
sume ever more resources and ultimately impact the Social
Social Security Funds. This motivates us to communicate more
Security Funds. We conscientiously fulfil all our promises and obli-
and to continue with the efforts we have made for a number of
gations while keeping our costs under strict control in the clear
years to improve the transparency of our activities. We are none-
interests of the social benefit schemes. Operating costs amount-
theless aware that informational value does not increase in line
ing to 18 basis points of the total assets we manage demonstrate
with the quantity of the information published, particularly as this
the efficiency of our management.
information quickly becomes very complex. We maintain a website
that is very extensive in comparison to those of other institutions.

2
The new Social Security Funds Law
The Board of Directors is pleased with the progress of the
discussions in relation to the adoption of a new Social Security
Funds Law. The Law envisages establishing compenswiss as an
independent public institution with its own legal personality and
formally entrusting it with managing the three Social Security
Funds (AHV / IV / EO), which will remain segregated from each other.
This creates a structure in which the governance of compenswiss
can be anchored in a legally coherent manner. Overall, the Social
Security Funds Act creates a clear and transparent legal setup
both for compenswiss itself and for its relationships with its Swiss
and foreign business partners.
Changes on the Board of Directors
After the departure of Martin Flügel and Nicolas Brunschwig at
the end of 2015, at the beginning of 2016 the Board of Directors
welcomed Bénédicte Montant, a partner at the architectural firm
3BM3  SA in Geneva, and Adrian Wüthrich, Chairman of Travail.
Suisse in Bern. Our colleagues quickly found their feet on our Board
and we are very happy with the excellent contributions they make.
Thanks
The Board of Directors would like to thank all our partners inside and
outside the Federal administration, with whom it maintains good,
constructive relations and who give support to compenswiss in
fulfilling its duties. Personally, I would like to thank my colleagues
on the Board of Directors who gave me a warm welcome and have
provided me with solid support in my responsibilities. I would also
like to thank personally the Management Board and all the staff at
the Management Office, led with great expertise by Eric Breval, as
well as those who are committed to supporting us in our mission
in the interests of our country.
3
 Report of the Director
General environment and
performance of compenswiss
The Management Office of the
AHV / IV / EO Social Security Funds
– compenswiss – performed well
overall in overcoming the chal-
lenges of the past financial year.
However, as for all investors,
managing the assets of the
Social Security Funds in a highly
unfavourable capital market
environment is difficult. Realis-
Eric Breval, Director
tic investment returns remain
low. In addition, negative inter-
est rates make things harder for us than for other investors.
Because of their role as a liquidity reserve for the social benefit
schemes, a large part of the assets of the Social Security Funds
have to be kept liquid. Cash including short-term money market
investments make up around 9% of all investments, which in a
negative interest environment has a clear influence on the results.
Furthermore, the legally prescribed safety of the capital invest-
ments implies that a substantial proportion of our assets (in our
case around two-thirds of securities) be invested in bonds, which,
in the ongoing low and negative interest rate environment, cost
money or generate only marginal returns.
Public-relations work at the Management Office is increasing.
The annual media conference is among the key instruments
of an increasing number of communication channels used by
compenswiss. Others include the Annual Report, the website,
various specialist presentations and media interviews by the
Chairman of the Board of Directors and by myself. Through these
channels, compenswiss has frequently highlighted among
other things the different conditions applying to investments
in comparison to those of other institutional investors such
as pension funds. For instance, the Social Security Funds are
primarily tasked with ensuring that the schemes can meet their
payment obligations at all times, while a pension fund is required
to generate a minimum interest rate over the long term. This
differing investment horizon leads to different allocations to the
various asset classes and accordingly to lower returns on average.
With increasing public interest, compenswiss is working continu­
ously to improve the transparency of its organisation and its
decision-making process on an ongoing basis. For instance, start-
ing in the reporting year more detailed performance figures and
information about all the managers tasked with managing assets
can now be found on the website.
4
Adjustments in asset management
The strategic investment process that is carried out every year
to review the risk budget and asset allocation is robust and has
proved its effectiveness. In the reporting year certain process
details were optimised. However, the Management Office and the
Board of Directors regularly examine the investment process from
a conceptual point of view. Two workshops were held in the report-
ing year for this purpose. The findings feed into optimisation of the
process on an ongoing basis.
At the operational level, changes were made to some asset man-
agement mandates. In the first quarter of 2016 the portfolio of
large cap Swiss shares, which had previously been run passively
by a large Swiss bank, was placed under the management of the
team of investment specialists at the Management Office.
In addition, in several cases the Management Office carried
out broad-based manager selection procedures conducted in
accordance with best practice. For high-yield bonds in euros the
asset management company Barings was chosen in a selection
procedure for this segment. For bonds in local emerging market
currencies, BlackRock was selected as manager. The segment
“foreign unlisted real estate” was introduced as a new asset class.
Monitoring and risk control
At the beginning of 2016, KPMG was confirmed as the internal
auditor for the Management Office. The mandate involves two
annual missions, the first one covering a review of the inter-
nal control system and the second one specific thematic areas
defined by the Board of Directors. During the reporting year and
with respect to the second mission, KPMG reviewed the project
management procedures.
On the other hand, important risk control improvements were
introduced. An additional quarterly report drafted by Risk Manage-
ment and Compliance now enables the Board of Directors to bet-
ter review financial, operational and compliance risks.
As a whole, during the reporting year, the risk limits were
respected. Furthermore, no significant material operational losses
were recorded in the internal or external business.
Management
Left to right: Eric Breval, Director – Christophe Schaer, Chief Investment Strategist – Muriel Widmer, General Secretary & Compliance Officer
– Pascal Voide, Chief Operations & Finance – Frank Juliano, Head of Asset Management – Marc Pfenninger, Chief Risk Officer.

Legal framework
For the purposes of information technology, administrative premises
and operational expenditure, the Social Security Funds voluntar-
ily comply with the Federal Act on Public Procurement, thereby
anticipating the rules in the draft Social Security Funds Law. In this
connection, in the reporting year legal opinions were issued for a
number of projects and general terms and conditions were drawn
up to assist individual departments in awarding contracts. Regular
contributions are also made by compenswiss to the Federal gov-
ernment’s management remuneration reporting.
Exercise of voting rights at general meetings
For more than 15 years compenswiss has been exercising voting
rights at the general meetings of listed Swiss companies, and has
therefore made use of shareholders’ rights as they have applied to
other institutional investors since 2014 under the Swiss Ordinance
against Excessive Remuneration at Listed Joint Stock Corporations.
The voting behaviour of compenswiss is summarised in detail and
an update is published three times a year on the website.
Training was stepped up, too. In the future compenswiss, in
collaboration with the Central Compensation Office (ZAS), will begin
offering apprentices part of their training. For years compenswiss
has regularly offered students the opportunity to undertake an
internship. High priority is accorded to continuing education. On
average last year, each employee at compenswiss used 2.5 days
for training in a specific area. Overall, compenswiss enabled its
employees to take part in 49 different educational programmes.
The IT on-call service was outsourced so that internal staff can
devote themselves fully to maintaining and optimising the sys-
tems. Additional measures were also taken to ensure more secure
access to e-mails using smartphones and the internet. Further-
more, a centralised contract management system was introduced.
In all its activities, the Management Office pursues strict cost man-
agement. Operating costs increased only slightly at 0.18% despite
the broadened scope of our responsibilities, without compromis-
ing the quality of the investment process. The improved cost-ben-
efit relationship achieved through greater insourcing enabled the
stable trend in costs recorded in previous years to be maintained.

Resources

In the reporting year the number of employees increased from

52 to 55. As in the previous year, no employees left. Staffing was
increased in Asset and liability management (ALM), which deals in
particular with the risk profiles of the three Social Security Funds,
and in Business support. The slight increase in FTEs (Full-time
equivalent) will also enable internal expertise to be expanded and
dependence on third parties to be reduced.

5
 Governance

Duties Organisational chart of the Social Security Funds

The Social Security Funds are responsible for central management
of the liquidity and assets of the Old Age and Survivors’ Insurance
(AHV), Disability Insurance (IV) and Income Compensation Insur-
ance (EO) schemes.
They ensure the ability to meet AHV, IV and EO payment obliga-
tions at all times and invest the assets safely and with returns in
line with the market.
The Board of Directors presents the Annual Report with the balance
sheets and income statements of the AHV, IV and EO Social Security
Funds and an overview of the investments to the Federal Council.
Organisational structure
The organisational structure of the Social Security Funds set out
below ensures that their activities are performed in line with mod-
ern corporate governance rules.
The Social Security Funds are separate legal entities. Direction
thereof is the responsibility of a Board of Directors selected by
the Federal Council. Day-to-day responsibilities are fulfilled by the
Management Office of the Social Security Funds, which reports to
the Board of Directors.
Board of Directors
The Federal AHV / IV Commission submits proposals to the Fed-
eral Council, which then appoints the 11 members of the Board of
Directors, including the Chairman and Vice-Chairman. Appropri-
ate representation for insured persons, Swiss trade associations
and the Federal government is ensured. A representative of the
Federal Social Insurance Office and a representative of the Federal
Finance Administration attend the meetings of the Board of Direc-
tors in an advisory capacity.

Swiss Federal
Council
FSIO
AHV/IV-
Committee
FFA

Internal Audit
Auditor: Federal
Compensation Board of Directors
Control of
Offices (11)
Finances
External Investment
Controller

HR Board Voting Rights Real Estate

Committee Committee Committee Committee
(3) (6) (3) (3)

Central
Compensation Management Fund Management
Compensation
Offices Office Company
Office

Strategic Allocation Auditor Fund

Global Custodian
Consultant Management

governing and executive bodies

Auditor of the Funds and Management Office
External Managers
Global Custodian belongs to the Federal administration
external service providers

6
As at 31 December 2016 the Board of Directors is composed as follows:
Board of First Name Representative Activity Last Start of
Directors name reelection mandate
Chairman Manuel Leuthold Insured Independent Administrator 31.12.15 01.01.16
Vice-Chairman Sandra Gisin Insured Manager, Foundation for 31.12.15 01.01.12
Flexible Retirement FAR
Member Thomas Daum Economic Chairman of the Board of Directors 31.12.15 01.01.08
association – of SERV (Swiss Export Risk Insurance)
Employers
Daniel Lampart Economic Head of the Secretariat of the 31.12.15 01.01.11
association – Swiss Federation of Trade Unions,
Employees Chief Economist
Gabriela Lenherr Economic Head of Finance and Services, 31.12.15 01.01.12
association – Swiss Commercial Association
Employees
Bénédicte Montant Economic Partner, 31.12.15 01.01.16
association – Atelier d’architecture 3BM3 SA
Employers
Barbara Rigassi Insured Managing Partner, 31.12.15 01.01.14
BHP Brugger and Partners Ltd.
Henrique Schneider Economic Head of Department of Economy, 31.12.15 01.04.15
association – Energy and Environment,
Employers Swiss Trade Association
Michaela Troyanov Confederation Founder & Managing Partner, 31.12.15 01.04.15
Wealth & Legal Strategies
Martin Wenk Insured Member of the Corporate Executive 31.12.15 01.01.14
Committee of the Baloise Group,
Head of Asset Management
Adrian Wüthrich Economic Chairman, Travail.Suisse 31.12.15 01.01.16
association –
Employees
Advisory vote Urs Eggenberger Representative FFA Deputy Director, 01.01.08
Federal Financial Administration
Werner Gredig Representative FSIO Senior scientific consultant 01.01.11
to Director of Federal Social Insurance Office

Mandates last four years and may be extended. The maximum

period of office is twelve years.

The Board of Directors decides on the investment of the assets of

the Social Security Funds, monitors the execution of its decisions
and is responsible for the annual financial statements. Its activ­
ities extend to the AHV, IV and EO.

In the reporting year the Board of Directors met for four meetings
and two internal training seminars.

7
Committees Personnel Committee

With a view to ensuring efficient handling of its extensive business,
the Board of Directors has delegated various tasks and responsi-
bilities to the Board Committee. It is also assisted in preparing its
business and relieved of delegated responsibilities by three other
specialist committees – the Personnel Committee, the Voting
Rights Committee and the Real Estate Committee. All committees
are subordinate to the Board of Directors and provide it with regu­
lar reports.
The Personnel Committee is comprised of three members of the
Board of Directors, including at least the Chairman or Vice-Chairman
of the Board of Directors.
As at 31 December 2016 the Personnel Committee is composed as
follows: Sandra Gisin, Chair, Thomas Daum and Martin Wenk.
The Personnel Committee is responsible for all matters relating to
the recruitment, remuneration and training of personnel.

In the reporting year the Personnel Committee met six times.

Board Committee

The Board Committee is comprised of the Chairman and the
Vice-Chairman of the Board of Directors and at least three other
members selected by the Board of Directors from among its own
members. The representatives of the Federal Social Insurance
Office and the Federal Finance Administration attend its meetings
in an advisory capacity.
Voting Rights Committee
The Voting Rights Committee is comprised of three members, includ-
ing at least the Chairman or Vice-Chairman of the Board of Directors.
As at 31 December 2016 it is chaired by Sandra Gisin. Barbara Rigassi
and Martin Wenk are members of the Committee.

As at 31 December 2016 the Board Committee is composed as The AHV / IV / EO Social Security Funds fulfil their responsibility as
follows: shareholders by exercising their due voting rights at all Swiss com-
Chairman: Manuel Leuthold panies with shares listed on an exchange in Switzerland or abroad.
In the Annual Report of the Social Security Funds and in reports
Vice-Chairman: Sandra Gisin
published regularly on the compenswiss website, information is
Member: Thomas Daum
provided in anonymous form on voting rights decisions.
Gabriela Lenherr
Michaela Troyanov In the year under review the Voting Rights Committee made use
Martin Wenk of its voting rights on individual motions at 92 general meetings of
Advisory vote: Urs Eggenberger Swiss companies. A detailed list of the decisions can be found on
the website of the Social Security Funds at www.compenswiss.ch/
Werner Gredig
governance.
The Board Committee is tasked with preparing the business of the
In addition to the work carried out over the year to prepare voting
Board of Directors. It takes the decisions required to ensure ongoing
rights decisions, the Voting Rights Committee held three meet-
business management. Its individual duties and powers are deter-
ings in 2016. Particular attention was paid to the development and
mined by the Board of Directors. In asset management, the Board
results of its activities and to the internal voting rights guidelines.
Committee determines the specifics of strategic asset allocation. It
sets the benchmarks and determines the investment instruments.
The Board Committee also decides whether compenswiss will
manage the assets internally or whether external managers will
be commissioned.

In the reporting year the Board Committee met for five meetings.

8
Real Estate Committee
The Real Estate Committee is comprised of three members,
including the Chairman of the Board of Directors and two mem-
bers with expertise in real estate.
As at 31 December 2016 the Real Estate Committee is chaired by
Manuel Leuthold. Bénédicte Montant and Bernard Grobéty (exter-
nal member) are members of the Committee.
The Real Estate Committee deals with direct real estate invest-
ments and regularly had to make decisions as part of the ongoing
renovation and extension project at the Central Compensation
Office (ZAS). According to the plans, space is to be created in this
building complex in Geneva for all employees of the Central Com-
pensation Office towards the end of 2017.
In the year under review the Real Estate Committee met seven times.
Management Office
The Management Office, located in Geneva, employs a staff of 55.
It is comprised of a Management Board and five departments (Gen-
eral Secretariat & Compliance, Risk Management, Treasury & ALM,
Asset Management, Operations & Finance).
Management
The Management Board is comprised of six members – a Director
and five departmental heads. As at 31 December 2016 the Man-
agement Board is composed as follows:
Director: Eric Breval
Members of the management board:
Frank Juliano Head of Asset Management
Marc Pfenninger Chief Risk Officer
Christophe Schaer Chief Investment Strategist,
Deputy Director
Pascal Voide Chief Operations & Finance
Muriel Widmer General Secretary & Compliance Officer
The Management Office is responsible for the day-to-day oper-
ational business of the Social Security Funds. It implements the
investment strategy decided upon by the Board of Directors using
internal and external investment specialists, monitors financial
risks in accordance with the parameters defined by the Board of
Directors, controls operational risks and monitors the investments
and accounting.
Control bodies and corporate governance
Auditor
The auditor is the Swiss Federal Audit Office. It reports its audit
results to the Federal Council and the Board of Directors.

Internal audit
Beginning in the 2016 financial year, the Board of Directors created
General Secretariat Risk
& Compliance Management an internal audit office, which reports directly to the Chairman of
the Board of Directors. The purpose of this is to enhance govern-
– Legal Counsel – Financial Risk ance through a “third line of defense” in addition to the existing
– Administration/ Management internal control bodies. The role of internal auditor was delegated
Communication – Investment Monitoring
to KPMG, an external specialist provider.
– Human Resources – Operational
Risk Management External Investment Controller
– Performance & Reporting The External Investment Controller provides an assessment of the
performance achieved and of the investment processes. This role
is currently fulfilled by PPCmetrics AG, which reports its findings
Asset Operations
Treasury-ALM directly to the Chairman of the Board of Directors.
Management & Finance

– Treasury – External – IT
– ALM Investments – Finance
– Overlay – Active Strategies – Back Office
Management – Indexing Strategies – Project Man-
agement Office
– Real Estate

9
Compliance with laws and
“best practice” in corporate governance
compenswiss complies with the applicable laws in its areas of
activity and adheres to the relevant standards, guidelines and
internal regulations.
compenswiss follows modern corporate governance rules and
seeks to act in accordance with best practice with regard to cor-
porate governance.
An overview of all management and control bodies and rules of gov-
ernance for compenswiss can be found in the document “Corpor­
ate Governance Principles”, available on the www.compenswiss.ch
website. This document is updated annually.
Dialogue and communication
compenswiss ensures a good flow of information between the dif-
ferent bodies and fosters constructive collaboration among them.
The Management Board of compenswiss maintains an open dia-
logue with the Board of Directors and other entities. compenswiss
likewise ensures transparent communication with its employees.
The website www.compenswiss.ch plays an increasingly central
role in conveying information and knowledge. It is regularly updated,
includes precise information on the work of compenswiss and en­­
ables all interested parties to stay informed.
This Annual Report is also available on our website.

10
 Market conditions

In 2016 the markets were driven by unexpected political events Financial market performance
such as Brexit and the result of the US election. Even if the immedi-
In the first half of the year, the prices of Swiss and international
ate impact appears to be relatively limited, the implications in the
government bonds rose as a result of market yields falling further.
coming years are likely to influence the performance of invested
In the second half of the year, however, the prospect of a rate rise
assets. The central banks continued to play a decisive role. In this
in the US and of broad reflation pushed the general yield level back
environment the Swiss economy performed in very robust fashion
up, eroding some of the gains from the first half. Corporate bonds
despite the strength of the Swiss franc. The Swiss National Bank
performed better than government bonds because of their credit
(SNB) had to intervene on occasion, though, particularly in order to
risk premium. For that reason, corporate, high-yield and emerging
stabilise the exchange rate against the euro.
market bonds made generally positive contributions to the perfor-
mance of the portfolio.
Central bank policy and general economic performance
The equity markets presented a mixed picture. Despite a signifi­
In the United States investors had to wait until December for the
cant correction in the emerging markets after the election of
interest rate increase from the US central bank (Fed) that had been
Donald Trump, it was in the emerging markets and the US market
in the cards for some time. Although indicators such as the fall in
that the best performances resulted. Europe and Japan ended the
the unemployment rate and the rise in wages had pointed overall
year more or less unchanged. Swiss large caps closed the year
to a rate rise since the end of the first quarter of 2016, external
in negative territory, with financial and pharmaceutical stocks in
factors, including Brexit, appear to have come in the way of the
particular dragging down performance. The shares of small and
Fed’s plans.
medium-sized Swiss companies fared much better. They ended
Unlike the Fed, the European Central Bank (ECB) pursued a very the year in positive territory despite the effect of the strong franc
expansionary monetary policy. For instance, the ECB extended on the export sector.
its asset purchase programme to include corporate bonds with a
Commodities shone in 2016 on a broad front after a very difficult
view to stimulating inflation and demand. This was inconvenient
2015. At the start of the year the oil price reached a low not seen
for the SNB. It had to attend to the slightest movements in the euro
for more than ten years, but then recovered sharply. Gold also
and repeatedly boost it by making purchases, particularly when
recorded a good performance. It benefited from political uncer-
some banks in European periphery countries came under pres-
tainty and the central banks’ expansionary monetary policy.
sure in the middle of the year.
In terms of currencies, in addition to the depreciation of the pound
The Japanese central bank (BoJ) made several attempts to reboot
sterling mentioned above, the renminbi’s creeping loss of value is
the Japanese economy with unconventional measures. After the
noteworthy. China is clearly determined progressively to weaken
unexpected introduction of a negative interest rate in January and
its currency. Even if several indicators point to China’s first steps on
a rather patchy impact from this measure, in late summer the BoJ
the way to becoming a consumption-based economy, the country
switched to controlling the ten-year interest rate. Until then the
still wishes to maintain its exporting capability and to uncouple its
central banks had generally operated only with short-term interest
currency from further rises in the US dollar.
rates.

In the political arena, the UK vote to leave the European Union Yield development at ten years
made for uncertainty on the markets with regard to the timetable, 6%
the procedure and the consequences of Brexit. So far the main 5%
reaction has been from the pound sterling, which has depreci- 4%
ated sharply, and GBP yields, the volatility of which reflects a high 3%
degree of uncertainty regarding the future stance of the UK central 2%
bank (BoE). The latter is in a dilemma in view of the consider­
1%
able risk of recession in the UK and the potential effects of high
0%
imported inflation resulting from the depreciation of the pound.
–1%
Donald Trump’s election as the new president of the United States –2%
31.12.06

31.12.07

31.12.08

31.12.09

31.12.10

31.12.11

31.12.12

31.12.13

31.12.14

31.12.15

31.12.16

was not expected on the markets. Although shares in the indus-

trialised countries were robust overall, yields embarked on an
upward trajectory, particularly in the emerging economies. This CHF 10 years EUR 10 years USD 10 years
was in the expectation that government investment programmes
would strengthen the reflationary trend and improve the growth
prospects for the US economy. The unresolved consequences of
Brexit and the current unclear policy direction of the new US presi-
dent will probably make for further volatility on the markets as 2017
gets under way.

11
 AHV: overview of the balance sheet
and income statement
Balance sheet (in CHF million) 31.12.2016 31.12.2015 31.12.2014

Cash and cash equivalents 29 697 28 478 28 120

Assets of social benefit scheme 4 697 4 623 4 902

Due from IV 11 406 1 2 229 12 843

Total assets 45 800 45 330 45 865

Obligations of social benefit scheme 1 1 3 2 1 101 1 07 7
Equity 44 668 44 229 44 788
Total liabilities and equity 45 800 45 330 45 865

Income statement (in CHF million) 2016 2015 2014

Total income 41 764 4 1 1 56 40 546

Total expenses – 42 530 – 41 735 – 40 866
Operating result – 766 - 579 –   320

Share of investment performance 1 083  - 2 37     1 752

IV Interest
122 257 275
Comprehensive result 439 – 559 1 707

AHV: performance
Performance Performance Performance
Performance (in %) 2016 annualised annualised
(1 year) (3 years) (5 years)

AHV market portfolio 5.26 4.77 4.64

AHV market portfolio after interest rate

and currency hedging and equity overlay 3.93 3.37 3.98

AHV treasury portfolio – 0.04 0.04 0.1 3

AHV total invested assets 3.75 3.13 3.72
(after interest rate and currency hedging and equity overlay)

Medium-term performance target 0.85 1.1 1 1.32

Accounting principles: the performance is calculated using the time-weighted return (TWR) method except for the Treasury for which the Linked Internal Rate of Return (LIRR)
method is applied. The calculation is based on the total assets of the AHV Social Security Funds. The net performance is calculated after deduction of the fees for external asset
managers and includes the profit/loss (realised and unrealised gains and losses), income (dividends, interest, securities lending commission) and transaction costs (brokerage,
stamp duty, custody account fees and other levies).

For 2016, the AHV Fund has a total volatility target of 4.0%.
At the beginning of 2016, the AHV had total assets of
CHF 28 456 million. The AHV social benefit scheme is subject to
the most pronounced seasonal liquidity fluctuations, due to the
time lag between the contributions being paid in and pension pay-
ments being paid out in any given month.
Consequently, the AHV treasury portfolio fluctuated between a
low of just a few million and a high of CHF 2 914 million in 2016. To
protect the investments held in the market portfolio from these
significant seasonal fluctuations, the asset allocation takes these
patterns into account.
At the end of the year, the AHV’s total assets amounted to
CHF 29 679 million representing an increase of CHF 1 223 million.
The assets generated a performance of 3.75%. Over a period of
five years the annualised performance reached 3.72%, e.g. has
exceeded by 2.40% the medium-term forecast target of this port-
folio. Average volatility was 3.1%. The outcome of the risk adjusted
performance (Sharpe ratio) amounts to 1.4.

12
 IV: overview of the balance sheet
and income statement
Balance sheet (in CHF million) 31.12.2016 31.12.2015 31.12.2014

Cash and cash equivalents 4 27 7 4 264 4 255

Assets of social benefit scheme 795 784 839

Total assets 5 072 5 048 5 094

Due to AHV 11 406 12 229 12 843

Obligations of social benefit scheme 72 48 94

Equity – 6 406 – 7 229 – 7 843

Total liabilities and equity 5 072 5 048 5 094

Income statement (in CHF million) 2016 2015 2014

Total income 9 893 9 949 9 938
Total expenses – 9 20 1 – 9 304 – 9 254

Operating result 692 645 684

Share of investment performance 131 – 31  238
result
Comprehensive 823 614 922

IV: performance
Performance Performance Performance
Performance (in %) 2016 annualised annualised
(1 year) (3 years) (5 years)

IV market portfolio 5.26 4.77 4.64

IV market portfolio after interest rate

and currency hedging and equity overlay 3.94 3.37 3.98
base portfolio (treasury)
IV – 0.04 0.04 0.1 3

IV total invested assets 2.63 2.28 2.61
(after interest rate and currency hedging and equity overlay)

Medium-term performance target 0.45 0.7 1 0.92

Accounting principles: the performance is calculated using the time-weighted return (TWR) method except for the Treasury for which the Linked Internal Rate of Return (LIRR)
method is applied. The calculation is based on the total assets of the IV Social Security Funds. The net performance is calculated after deduction of the fees for external asset
managers and includes the profit/loss (realised and unrealised gains and losses), income (dividends, interest, securities lending commission) and transaction costs (brokerage,
stamp duty, custody account fees and other levies).

The IV Fund’s volatility target was maintained at 3.0% for 2016.
It has a lower volatility target than the two other social benefit
schemes because of its specific financial situation. Under the vola­-
tility management model used, a lower risk target means a larger
relative share in the base treasury portfolio and therefore a smaller
relative share of the market portfolio.
The IV’s total assets amounted to CHF 4 262 million at the begin-
ning of 2016 and CHF 4 274 million at the end of the year, repre-
senting an increase of CHF 12 million.
The assets generated a performance of 2.63%. Over a period of
five years the annualised performance reached 2.61%, e.g. has
exceeded by 1.69% the medium-term forecast target of this port-
folio. Average volatility was 2.3%. The outcome of the risk adjusted
performance (Sharpe ratio) amounts to 1.5.

13
 EO: overview of the balance sheet
and income statement
Balance sheet (in CHF million) 31.12.2016 31.12.2015 31.12.2014

Cash and cash equivalents

867 903 786
Assets
of social benefit scheme 1 64 181 189
Total
assets 1 031 1 084 975

Obligations
of social benefit scheme 7 8 7
Equity
1 024 1 076 968
Total liabilities and equity 1 031 1 084 975

Income statement (in CHF million) 2016 2015 2014

Total income 1 658 1 8 1 8 1 790

Total expenses – 1 74 5 – 1 703 – 1 668

Operating result –  87 115 12 2

Share of investment performance 35 – 7 48

Comprehensive result – 52 108 170

EO: performance
Performance Performance Performance
Performance (in %) 2016 annualised annualised
(1 year) (3 years) (5 years)

EO market portfolio 5.26 4.77 4.64

EO market portfolio after interest rate

and currency hedging and equity overlay 3.93 3.37 3.96
base portfolio (treasury)
EO – 0.04 0.04 0.1 3

EO total invested assets after interest rate 3.85 3.25 3.76
and currency hedging and equity overlay

Medium-term performance target 0.85 1.1 1 1.32

Accounting principles: the performance is calculated using the time-weighted return (TWR) method except for the Treasury for which the Linked Internal Rate of Return (LIRR)
method is applied. The calculation is based on the total assets of the EO Social Security Funds. The net performance is calculated after deduction of the fees for external asset
managers and includes the profit/loss (realised and unrealised gains and losses), income (dividends, interest, securities lending commission) and transaction costs (brokerage,
stamp duty, custody account fees and other levies).

The EO Fund has a volatility target of 4.0% for all its assets for 2016.
This Social Security Fund has a small capital base and is very sen-
sitive to the changes in incoming and outgoing payments that can
occur every month.
This Fund had total assets of CHF 902 million at the beginning of
2016. The surplus liquidity from insurance activities was trans-
ferred systematically and continuously to the market portfolio.
At the end of 2016, the EO’s total assets amounted to CHF 866 mil-
lion, representing a decrease of CHF 36 million.
The assets generated a performance of 3.85%. Over a period of
five years the annualised performance reached 3.76%, e.g. has
exceeded by 2.44% the medium-term forecast target of this port-
folio. Average volatility was 3.1%. The outcome of the risk adjusted
performance (Sharpe ratio) amounts to 1.5.

14
 Overview of the investment balance sheet
and investment result
Assets (in CHF million) 31.12.2016 31.12.2015 31.12.2014

Cash and money market investments 3 020 3 412 2 159

Investments 32 232 30 592 31 410

Direct loans 2 839 3 189 3 087
Swiss franc bonds 4 327 4 939 6 9 11
Foreign currency bonds 10 319 9 1 91 9 601
Swiss equities 1 374 1 429 1 492
Foreign equities 5 129 4 775 4 617
Investment funds 7 867 6 720 5 368

Positive replacement values 244 245 262

Investment property 133 104 72

Debtors 162 292 684

Tangible assets 30 31 32
Total assets 35 444 34 327 34 285

Liabilities (in CHF million)

Current liabilities – – 400

Other investment liabilities 578 706 751

Other liabilities 47 2 4
Equity 34 819 33 619 33 130
Total liabilities and equity 35 444 34 327 34 285

Investment performance (in CHF million) 2016 2015 2014

Interest income 403 479 626

Income on capital 226 207 1 95

Securities lending commission 4 4 3

Result from real estate investments 3 3 4
Realised and unrealised capital gains/losses 673 – 8 41 1 446
Interest cost – 60 – 128 – 237
Investment performance 1 249 – 276 2 037

15
 Overview of investment performance

Category Amount Performance Performance Difference Contribution

(in CHF million) (Portfolio (Benchmark (in %) (in %)
in %) in %)

Money
market investment 954 – 0.18 – 0.75 0.56 – 0.01
Loans
2 7 2 1 0.13 0.07 0.07 0.03
Swiss
francs bonds 3 456 1.26 1.36 – 0.10 0.1 7
Foreign
currency bonds: 14 639 5.76 5.04 0.72 2.46
Government
bonds 3 974 1 .38 1.53 – 0.15 0. 1 7
Inflation-protected
bonds 1 715 5.89 5.97 – 0.08 0.29
Emerging
markets 1 116 16.93 11.84 5.09 0.5 1
Corporate
bonds 4 483 5.63 5.55 0.07 0.76
Higher
yielding securities 3 351 7.57 6.91 0.66 0.72
Equities:
7 850 8.87 8.54 0.34 1.89
Large
caps 6 904 7.83 7.78 0.05 1.46
Small
and mid caps 946 16.46 15.07 1.39 0.44
Real
estate: 2 262 6.58 4.82 1.76 0.42
Switzerland
direct 135 – 0.29 – 0.29 0.00 0.00
Switzerland
listed 1 473 9.07 7.5 1 1.56 0.40
Global
listed 332 3.25 2.82 0.43 0.0 1
Global
not listed 322 – 
1.36 – – 0.0 1
Commodity
investment 270 12.69 13.35 – 0.67 0.14
Tactical
investment 597 3.91 – – 0.1 7

Market
portfolio 32 749 5.26 5.03 0.22 5.27
Hedging
of currency risk – 266 – 1.49 – 1.53 0.04 – 0.77
Hedging
of interest rate risk – 1 0 7 0.26 0.53 – 0.27 – 0.1 4
Equity
overlay 23 – 1.96 – – – 0.43

Market
portfolio after hedging 32 399 3.93 3.98 – 0.05 3.93

Treasury
(Basic portfolio) 2 389 – 0.04 – 0.74 0.7 1

Accounting principles: the performance was calculated using the time-weighted return (TWR) method except for the Treasury for which the Linked Internal Rate of Return (LIRR)
method is applied. The calculation is based on the total assets of the three Social Security Funds. The net performance is calculated after deduction of the fees for external asset
managers and includes the profit/loss (realised and unrealised gains and losses), income (dividends, interest, securities lending commission) and transaction costs (brokerage,
stamp duty, custody account fees and other levies). The costs of the management office at the end of the financial year are allocated globally for the calculation of the return
after deduction of administrative costs. They are not allocated to the individual mandates and asset classes.

16
 Historic investment performance

Net performance (in %) 2016 2015 2014 2013 2012

Market portfolio 5.26 – 0.99 10.36 1.95 6.97

Money market investments – 0.18 – 0.03 0.1 2 – –
Interest-bearing
securities in Swiss Francs 0.72 1.96 6.07 – 1.35 2.98
Foreign
currency bonds 5.76 – 3.28 12.99 – 3 .1 1 7.83
Equities
8.87 – 1.93 13.52 16.07 11.55
Real
estate investments 6.58
1 5.95 16.43
1 1 0.69 16.37
Commodities
12.69 – 14.62 – 8.19 – 9.85 – 5.26
Tactical
investments 3.91 – 1.55 7.83 3.10 8.42
Hedging
of currency risk – 1.49 – 0.13 – 6.13 2.46 0.01
Hedging
of interest rate risk 0.26 – 1.68 – 2.83 1 .13 – 3.76
Equity
overlay – 1.96 – 0.10 – 0.80 – 0.61 –

Market
portfolio after hedging 3.93 – 0.77 7.1 1 2.84 6.98

Treasury
(base portfolio) – 0.04 0.1 1 0.05 0.13 0.47
Accounting principles: the performance is calculated using the time-weighted return (TWR) method except for the Treasury for which the Linked Internal Rate of Return (LIRR)
method is applied. The calculation is based on the total assets of the three Social Security Funds. The net performance is calculated after deduction of the fees for external asset
managers and includes the profit/loss (realised and unrealised gains and losses), income (dividends, interest, securities lending commission) and transaction costs (brokerage,
stamp duty, custody account fees and other levies). The costs of the management office at the end of the financial year are allocated globally for the calculation of the return
after deduction of the administrative costs. They are not allocated to the individual mandates and asset classes.

Contributions (in %) 2016 2015 2014 2013 2012

Money market investments – 0.01 0.00 0.00 – –

Interest-bearing securities in Swiss Francs 0.20 0.46 1.52 – 0.37 0.90

Foreign currency bonds 2.46 – 1.07 4.1 7 – 1 .06 2.56

Equities 1.89 – 0.48 3.2 1 3.25 2.1 4

Real estate investments 0.42 0.36 0.82 0.05 0.9 1

Commodities 0.14 – 0.14 – 0.21 – 0.22 – 0.2 1

Tactical investments 0.1 7 – 0.05 0.7 1 0.33 0.68

Hedging of currency risk – 0.77 0.48 – 2.45 0.93 0.32

Hedging of interest rate risk – 0.14 – 0.28 – 0.50 0.06 – 0.32

Equity overlay – 0.43 – 0.05 – 0.16 – 0.13 –

Market portfolio after currency hedging 3.93 – 0.77 7.1 1 2.84 6.98
1 since 2014, inclusive of direct investment

17
Investments Money market
According to the law, the Management Office manages the assets
of the AHV, IV and EO Funds in a joint investment pool while taking
instruments and loans
account of the individual financial risk profile of each of the social Money market instruments
benefit schemes. The investment policy was designed to guaran-
The asset class “Money market instruments” is composed of liquid
tee the solvency of the Social Security Funds at all times while at
assets in CHF, EUR and USD. In the reporting year this asset class
the same time earning a market return. Expanding on the basic
provided a return in Swiss Francs of – 0.3% for CHF, – 1.4% for EUR,
mission of the Social Security Funds, which is to provide a financial
and 3.4% for USD.
reserve or “buffer” for the social insurance system, the governing
and executive bodies further defined the investment objective to The strategic allocation to this asset class was reduced by 3% in
grow the asset base in real terms. the reporting year to 2% of the market portfolio.

A risk budget that takes account of the balance sheet and growth
Loans
prospects of the individual scheme is drafted for each of the
social benefit schemes. Annually, the Board of Directors reviews In the reporting year the asset class “loans” returned 0.1%.
this budget and defines the Strategic Asset Allocation (SAA), the
The neutral strategic allocation to this asset class was reduced
Annual Asset Allocation (AAA), and the detailed breakdown by
by 2 percentage points from 2015 and accounted for 10% of the
asset class.
market portfolio at the end of the year. The total value of the loans
The asset management and operating costs of the AHV / IV / EO granted to domestic borrowers such as cantons, municipalities
Social Securiting Funds amounted to CHF  39.8  mil­lion in the or public-sector entities was CHF 2 776 million at the end of 2016,
reporting year. including CHF 55 million from the allocation to tactical invest-
ments. At 8.5%, this component of the investment portfolio was
underweight by 1.5 percentage points.
Liquidity
It is the task of the Swiss Federal Social Security Funds to even
out the def­icits and surpluses of the different social insurance
Swiss franc bonds
schemes. All financial flows of the social insurance system (AHV, In the reporting year, Swiss franc bonds returned 1.3%.
IV, EO, unemployment insurance ALV and family allowances in
The strategic allocation to Swiss franc bonds was reduced from
the agricultural sector FLG) are processed through the Central
12% to 11% of the market portfolio in the course of 2016.
Compensation Office, which reports to the Federal Department of
Finance. The balance of these central social insurance accounts Lower interest rates compared to the previous year had a slightly
is then transferred to the Social Security Funds for cash settle­ positive impact on the value of the bonds in 2016. The exposure to
ment. In 2016, incoming payments totalled CHF 41 279 million bonds issued by foreign borrowers, being less liquid, was reduced
while outgoing payments amounted to CHF 41 289 million. This while the domestic bond segment remained overweight.
resulted in excess outflows from the social insurance system of
CHF 10 million.

The main task of the Treasury of the Swiss Federal Social Security
Funds is to ensure the solvency of the social benefit schemes.
The Treasury manages the liquidity of all three social benefit
schemes centrally. Its cash management procedures have to
take account of the financial flows and the significant seasonal
fluctuations rooted in structural differences for each of the social
benefit schemes.
In 2016, the return on Treasury investments was – 0.04%.
Foreign currency bonds
In the reporting year, foreign currency bonds provided a return of
5.8% in Swiss francs.
The neutral strategic allocation to this asset class was increased
by 3 percentage points in the reporting year 2016 to 44% of the
market portfolio. At the end of 2016, the total value of foreign
currency bonds was CHF 14 941 million, including CHF 302 million
from the allocation to tactical investments. This equals a total
exposure of 45.6%, which is 1.6 percentage points above the stra-
tegic target.

18
With a yield to maturity of 3.2%, the duration was 6.3 years at
year-end. Derivatives were used in different mandates to manage Foreign currency risks
interest rate risk. At year-end, the outstanding contract volume
As the Swiss Federal Social Security Funds have to settle their
was CHF 120 million for interest rate swaps and CHF 855 million for
payment obligations (pensions) in Swiss francs, the Swiss franc
interest rate futures.
represents the reference currency for the asset management. For-
eign currency risks are therefore systematically hedged against
Equities the Swiss franc in varying degrees depending on the market seg-
ment. At the end of 2016, assets in foreign currencies amounted to
In the reporting year, equities provided a return of 8.9%. CHF 22 128 million before and CHF 5 739 million after hedging. By
hedging the currency risk, the overall investment risk (measured
The neutral strategic allocation to this asset class was increased
by volatility) was reduced from 4.4% to 2.9%.
by 2 percentage points to 24% of total assets. At the end of
2016, equities had a total value of CHF 8 024 million, including
CHF  174  million from the allocation to tactical investments. This
equals a total exposure of 24.5%, which is 0.5 percentage points
Management of
above the strategic target. interest rate risks
Real estate investments Every year the Board of Directors also determines the target dura-
tion for each of the main currencies (USD, EUR and CHF). These
durations (five years) are in relation to the Funds’ selected invest-
In the reporting year, real estate investments returned 6.6%.
ment horizon.
The neutral strategic allocation to this asset class was increased
by 1 percentage point to 8% of the market portfolio. At the end of
2016, the total value of real estate investments was CHF 2 262 mil- Management
lion, which represents 6.9% of the portfolio and is 1.1 percentage
points below the strategic target. of equity risks
The programme for managing equity risks is primarily used for the
Tactical investments tactical positioning of the portfolio. Options are also used to opti-
mise the risk profile of the equity portfolio.
In the reporting year, tactical investments provided a return of
3.9% in Swiss francs.

As in the previous year, the strategic weight of this asset class was
0%. The total value of tactical investments was CHF 597 million at
the end of 2016, which equals 1.8% of the market portfolio.

Commodities
In the reporting year, commodities provided a return of 12.7% in
Swiss francs.

The neutral strategic allocation to this asset class remained

at 1% as in the previous year. Commodities had a total value of
CHF 286 million at the end of 2016, including CHF 16 million from
the allocation to tactical investments.

19
  / Photographs: Magali Koenig

compenswiss
Swiss Federal Social Security Funds
Boulevard Georges-Favon 6
1204 Geneva
Phone: 058 201 65 65
Fax: 058 201 65 31
E-mail: information@compenswiss.ch
www.compenswiss.ch