As investments are broadly diversified across asset classes, segments and markets, risk management is carried out centrally through hedging and risk control programmes that use derivative instruments. This approach significantly reduces transaction costs and enables consolidated control and monitoring of risks. The Executive Committee has the necessary instruments and control processes as well as the experience required for this task. Approximately 15% of derivatives are listed on stock exchanges and approximately 85% are over-the-counter ("OTC") derivatives, in particular for interest rates and currencies. OTC derivatives are concluded on the basis of ISDA contracts – the international standard in this field – and most of them benefit from a daily exchange of guarantees up to the replacement value of these instruments.

Foreign currency risk management

Given that compenswiss must settle its payment obligations (primarily pensions) in Swiss francs, the national currency is the benchmark for portfolio management. Foreign currency exposures are largely hedged, but to varying degrees depending on the currency. At the end of 2021, assets in foreign currencies amounted to CHF 23 billion before hedging and CHF 9 billion after hedging.

The currency risk is managed at two levels:

1) Hedging of the main currencies

The aggregate currency exposure of the entire portfolio is hedged to varying degrees for each of the eight major currencies (USD, EUR, GBP, JPY, AUD, CAD, SEK, HKD). As of 31 December 2021, hedging rates ranged from 50% to 90% (except for the SEK, which is not hedged due to its undervaluation). The currency hedge ratio is set annually by the Board of Directors based on a concept centred on the valuation gap against purchasing power parities. The US dollar, with a share of approximately CHF 11 billion, was 77% hedged at the end of 2021 and represents the main currency risk.

2) Hedging of secondary currencies

The Board of Directors determines the level of coverage for secondary currencies annually. In 2021, it was decided to hedge the currencies in which the AHV/IV/EO compensation Funds have significant exposure at a level of 10% (i.e. between approximately CHF 700 million for the largest exposure and approximately CHF 10 million for the smallest). However, the Investment Committee retains the tactical option to hedge the exposure of these currencies up to 50%.

Management of interest rate risks

The Board of Directors also sets an average life (duration) target for the USD, EUR and CHF bond portfolios each year. These durations are to be compared with the investment horizon (5 years) used as a reference for the Funds.

The hedging programme using derivatives makes it possible to determine a specific duration positioning and make portfolio adjustments without having to buy or sell underlying bonds in the portfolios. The following durations, by currency, were in effect in 2021: CHF 5.25 years, EUR 5 years, USD 5.75 years.

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